Foreign. In March of 2022, we published this video titled the Rise and Fall of Coinbase. We talked about how Coinbase strategically did its direct listing at the peak of the crypto bubble in 2021 to get the highest possible valuation, but their extraordinary profits and high transaction fees they charge to their users were not sustainable. At the time, Coinbase's stock was trading for about 180 dollars per share.

As expected, this talk has lost more than half its value since we published that video, and now it looks like we're finally reaching the end game for the company's inevitable demise. On March 22nd, 2023, Coinbase announced they had received a Wells notice from the SEC. This is an indication that an enforcement action against Coinbase is imminent. The Crux of the allegation is that many of the more than 200 coins listed on Coinbase are unregistered Securities and thus it is illegal to facilitate trading in them.

Also, Coinbase has a staking feature called Coinbase Earn where you can earn up to a six percent yield on your crypto. Holdings This earned feature may also be considered an unregistered security. Coinbase is already losing huge amounts of money and they were forced to lay off roughly 40 percent of their Workforce in two rounds of layoffs since last June. If they are forced to delist a large portion of their coins that the SEC considers as Securities and end their Coinbase Earn program, this could mean the end for the company.

Within a week of the SEC sending a Wells notice to Coinbase, the U.S Commodities Futures Trading Commission formerly charged Binance and its founder with widespread compliance failures and intentionally selling unregistered crypto derivatives to U.S residents. After the collapse of FTX last year, it has been almost universally expected that Regulators would start cracking down harder on the cryptocurrency industry in general. With these two actions against the two largest exchanges in the world, it looks like the hammer is finally coming down in this video. We'll go over the legal challenges facing Binance and Coinbase and why this could.

Mark The beginning of the end for the entire crypto industry. Yeah, Coinbase is the largest cryptocurrency Exchange in the US. In addition to being able to buy and sell Bitcoin they allowed their customers to trade over 200 altcoins. They also have something called Coinbase Earn where you can earn, staking or defy yield on your crypto.

Holdings The Crux of the Sec's case against Coinbase is that many of the crypto coins they offer can be classified as Securities. None of these Securities have been registered, so Coinbase should not be allowed to facilitate trading in them. Coinbase and their senior management team know that if they are forced to delist a substantial percentage of all coins that they offer, the decrease in Revenue could be catastrophic. So they desperately scrambled to come up with a defense strategy.

Almost immediately after receiving the wells notice, Coinbase CEO Brian Armstrong and Chief Legal Officer Paul Grewal hosted a live Twitter spaces where they explained their defense strategy. Here's Paul Grewal explaining why he believes that none of the coins listed on Coinbase are securities. Coinbase doesn't list Securities on our platform, so the entire premise, the entire foundation for the the enforcement action that's been threatened against us really doesn't hold Uh much sway. If you look at Coinbase's lengthy history of reviewing assets before we list them, we have of the tens of thousands of potential tokens out there in the universe that could list on Coinbase considered uh, well, over a thousand of them that have sought to be listed on our exchange, and after reviewing each of those assets one by one.

Chris Looking at the compliance issues that may arise from a listing, considering the cyber security risk, and first and foremost, whether or not as a legal matter, any of those assets are securities, we've only listed something like 240 of them. That is less than 20 percent. Indeed, less than 10 percent of them have actually met our standards to list on the platform. And that's that's not just Coinbase coming up with standards out of whole cloth.

We start with the law that Congress has passed. We look to opinions from courts that have interpreted that law. Starting with Supreme Court's opinion in in Uh, in Howie which many of those on this, um, on the spaces. We'll know well and applying those standards as best we can.

We've concluded that only a fraction of the assets actually qualified. It's not that we don't want to list the Securities in the future. In fact, we'd very much like to list digital Asset Securities in the future. but because we are not a registered exchange today, we do not list digital asset Securities Today we've shared Chris as you and Brian have touched on how we've gone about this with the SEC many times.

In fact, going back to our application to be a publicly listed company in our S1 and as part of that process, we detailed all this for the SEC And you know, after considering all those submissions, after hearing us out, after asking all the questions that they wanted Coinbase today as a public company because the SEC allowed that to happen. CEO Brian Armstrong goes into further detail about how Coinbase became a publicly traded company. Yeah, sure. So when Coinbase filed, we had to create this uh document called an S1 and you know it's a couple hundred pages long.

It goes through in a ton of detail describing our business. and of course you. You know the SEC is the one that allows companies to go public and they review the S1 and and give comments on it and things like that. And so in that document, we described exactly our listing process for assets.

We described all the assets that we had on the platform. At that time, we still follow the pretty much the exact same procedure today. Um, you know we also talked about staking. That's another one that's come up.

The SEC has now kind of changed their mind on. uh, we. We referenced our thinking program I think the word staking was mentioned 57 times in our S1 And so the SEC allowed us to become a public company knowing all these details. and so the question is, what what has changed? You know? Um, we haven't gotten any feedback from them about any of those processes or procedures that they think is different.

They haven't given us any feedback about something. we could be doing better to come in and register. or you know, prove it. Yet somehow they're now serving us with this Wells notice.

So that's a pretty strange fact. There are two main points that Grewalt and Armstrong made. First off, they say that they go through a rigorous review process for each coin that they list and make sure to only list coins that are not Securities. Secondly, the SEC approved Coinbase to become a public company.

At the time of their direct listing. they disclose all their listing procedures and the SEC seem to be fine with it. So why are they coming back and saying there's a problem? Two years later, Coinbase asserts that it adheres to the Howie test when listing new cryptocurrencies on its exchange established in the 1940s. The Howie test is a legal president that stipulates that an asset can be classified as a security if it involves an investment of money into a common Enterprise with the expectation of generating profit through the efforts of others.

Purchasing cryptocurrencies undoubtedly involves an investment of money, and most investors buy them with the hope of making a profit. However, determining the extent to which a cryptocurrency represents an investment in a common Enterprise eyes and whether the profits stem from the efforts of others can be more challenging to ascertain. Just because Coinbase says that its cryptos aren't Securities doesn't necessarily mean that the SEC has to agree. You might believe that you only had one drink and you're completely fine to drive.

This doesn't mean the police have to agree. So, the fact that Coinbase does their own internal review doesn't really give them much protection. The next stage of their defense is that they are a public company. When Coinbase listed its shares on the NASDAQ in early 2021, they had to go through a rigorous listing process with the SEC.

This included the filing of an S1 document with the SEC. The S1 contains a business description, financial statements, and risk factors of the company. The purpose of the S1 is so that prospective investors have adequate disclosures about the company before they buy shares. The SEC approved Coinbase is S1 and allowed them to become a publicly traded company.

Coinbase says that they disclosed their business model in listing criteria for coins In their S1. The SEC reviewed the S1 and thus knew about all of this. According to to Coinbase's logic, because the SEC approved the document, that means that they agreed that Coinbase's business model is above board. It is thus unreasonable for the SEC to change their mind two years later.

This line of reasoning exhibits a gross lack of understanding of the S1 review process. The fact that the SEC approved the S1 just means that Coinbase gave adequate disclosures about the state of its business and the risk factors associated with buying the company's shares. The approval of the S1 is not a carte blanche get out of jail free card for any potential enforcement action the SEC may bring in the future, and Coinbase is fully aware of this. As part of the S1, they were required to give disclosures about risk factors the business could face in the future.

One of the risk factors was a regulatory uncertainty surrounding the crypto industry. Here is a paragraph taken verbatim from their S1 quote: The complexity and evolving nature of our business and the significant uncertainty surrounding the regulation of the crypto economy requires us to exercise our judgment as to whether certain laws, rules, and regulations apply to us, and it is possible that the governmental bodies and Regulators May disagree with our conclusions. To the extent we have not complied with such laws, rules, and regulations. we could be subject to significant fines, revocation of licenses, limitations on our products and services, reputational harm, and other regulatory consequences.

Unquote, They may think that the coins they list on their exchange are not Securities, but given the novel nature of the crypto industry in relative lack of legal precedence, they knew from the beginning that there could be unforeseen problems. With all that being said, many of the coins that the SEC believes to be unregistered Securities have in all likelihood been listed on Coinbase for years. Why has the SEC waited so long to serve Coinbase with a Wells notice? Just because a law enforcement agency knows about an alleged crime and fails to contemporaneously bring enforcement action does not preclude them from bringing enforcement action in the future. As a completely hypothetical example, let's suppose you operate an unlicensed automobile repair shop where you remove the catalytic converters from people's cars.

This allows them to achieve better driving performance. The local police know that you're providing illegal modifications to cars, but they don't bother shutting you down because they have bigger fish to fry. Your repair shop is not a high priority for them. If you perceive this lack of enforcement as tacit permission to continue operating your illegal.

Enterprise That would be a big mistake because a few months later some of your customers start using their non-street legal cars to go drag racing around the city. This drag racing eventually results in car accidents which cause severe harms to the community. Unity Now your illegal repair shop becomes a top priority for Belize and they immediately come to shut you down. In a similar vein, crypto was not a top priority for the SEC back in 2021, but since the FTX disaster last year, reigning in the crypto industry has become the top priority.

Law enforcement agencies, including the SEC are free to bring down enforcement actions at any time of their choosing. and for Coinbase that time is imminent. Foreign Base says that all the coins on their platform are Commodities and are thus not within the jurisdiction of the SEC. The SEC thinks that some of the coins are securities.

so who is right? one of the coins you can buy and sell on coinbase is called Ave. Not only can you buy Ave on coinbase, you can also stage your Ave coins and earn a six percent yield. So what is Ave and how can you earn that six percent? Ave is a for-profit company that was funded by a Finnish man named Stani Kulochov in 2017.. they initially created a coin called Ethan and in 2020 they changed the name to Ave which is The Finnish word for a ghost.

Ave operates a peer-to-peer lending platform for cryptocurrencies. For example, let's say that someone wants to borrow stablecoin such as Usdt. They could deposit cryptocurrencies such as Ethereum as collateral. Ave will then match them to an anonymous lender who will lend them the stable coins.

The borrower will pay interest on his borrowings if the market price of the Ethereum held as collateral decreases. Ave will automatically initiate a margin call and sell the collateral to pay back the lender. It's important to note that all loans on Ave are over collateralized. So if you deposit one hundred dollars worth of Ethereum that's collateral, you are only able to borrow 80 worth of stable coins.

This is very different from how loans work in traditional Finance Imagine if you wanted to buy a house for one hundred thousand dollars and the bank requires you to post liquid assets worth one hundred twenty thousand dollars as collateral, this would be absurd because if you had one hundred twenty thousand dollars of liquid assets, you wouldn't need a mortgage in the first place. Borrowing money on Ave is completely Anonymous The lender has no idea who the borrower is and thus has no way of ascertaining their credit worthiness. Thus, the only way for this system to work is for loans to be overcollateralized. Because of the over collateralization, Ave is almost completely useless, and so far as facilitating real economic activity, it is used almost exclusively by crypto traders who deposit cryptos to borrow stable coins, which they use to buy even more speculative cryptocurrencies.

This allows them to create a leveraged long position and make a profit. Their cryptocurrencies go up even though Ave loans are over collateralized. This does not mean that they are completely safe from a lender's perspective. In the event that the crypto Market suddenly crashed, the value of the collateral may fall below the value of the loan before it can be liquidated.

This is where the Ave coin comes into play: Ave is a cryptocurrency that the Ave company created holders of the Ave coin can deposit them into the Avi safety module. In the event of a loan default, up to 30 percent of the Ave coins within the safety module can be sold to cover the shortfall. To compensate obvious takers for the risk, you earn a roughly six percent yield on the Quincy deposit into the safety module. The yield is paid in the form of new Ave coins that are created out of thin air.

Basically, some guy in Finland created fake Monopoly money called Ave coins which you can deposit into a fund that allows you to earn interest in the form of newly minted Monopoly money. As of the time of making this video, an off-8 coin is worth more than 80 dollars. So what makes this coin valuable? Ave Coins have voting rights to approve changes in the Ave protocol's functionality body. Also, in addition to receiving new Ave coins which are printed out of thin air at some point in the future, Ave holders may be entitled to receive a percentage of the fees generated from The Lending platform.

although this would be subject to a governance change voted on by Ave holders voting rights, potentially receiving a share of future profits. This all sounds a lot like a common stock such as the ones traded on the New York Stock Exchange or NASDAQ How Coinbase decided that Ave is not a security is frankly, Beyond me. but they will have their day in court very soon. Foreign Base isn't the only crypto company facing a regulatory Crackdown Binance is the largest and most profitable crypto Exchange in the world.

Its founder Chong Pong, Zhao or Cze has an estimated net worth of 34 billion dollars according to the Bloomberg Billionaires Index. But as we will see, this wealth may not have all come from legitimate means. Binance has two primary platforms. The original Binance, which is hosted on the website Binance.com allows customers to use huge amounts of Leverage and has very relaxed know your customer regulations.

Because of this, it only operates in jurisdictions with loose Financial regulations. It is not allowed to operate in the U.S Its second platform is Binance Us. Binance Us is a spot crypto trading platform that does not offer margin trading or crypto. Futures It is far more stringent know your customer policies which allow it to comply with the US laws.

According to a recent lawsuit filed by the U.S Commodities Futures Trading Commission, Binance.com has for years been actively acquiring U.S customers and working to skirt know your customer regulations. U.S Users can use Binance Us. However, Binance can make far more Revenue if the user is on Binance.com instead because of the lucrative commission fees on margin and crypto. Futures Trading Binance.com did not allow users with Us-based IP addresses to trade on Binance.com but this restriction can easily be bypassed by using a VPN which can make it look like you're logging in from a different country.

Binance actively encouraged U.S citizens to open Binance.com accounts with Vpns going so far as to post an article on the Binance Academy website called a Beginner's Guide to Vpns, Stock Brokerages, and even Crypto. Brokerages in the US And many other countries require new customers to provide pictures of government-issued ideas to confirm their true identity. but Binance didn't require any identity verification at all unless you want to withdraw more than two Bitcoins per day. This restriction is pretty meaningless given that two Bitcoins is worth about sixty thousand dollars at today's market prices.

So as long as you have a VPN pretty much anyone in the world could read on Binance.com Because of this, a large portion of their users came from countries where they are not legally allowed to operate. An internal presentation from July of 2019 said that 19 of their trading Revenue came from U.S Customers making the US their biggest Market their second biggest Market was China where they are also not allowed to operate. In the summer of 2021, Binance was coming under increasing pressure from various Regulators around the world to beef up its know your customer procedures, so they implemented mandatory ID verification for all users, not just ones that wanted to withdraw more than two Bitcoins per day. However, CZ knew that this would have a severe negative impact on the company's revenue and he needed a way to mitigate it.

In addition to serving individual investors, Binance is also used by Crypto, hedge funds and high Frequency. Traders These institutional clients can have hundreds of millions or even billions of dollars in their Binance account and often execute thousands of Trades per day. Binance internally referred to these large customers as VIPs Just one of these clients could generate millions or even tens of millions of dollars of transaction fees and many of them were based in the US After they were forced to tighten up their know your customer protocols, Binance helped these VIP clients set up Shell companies in the British Virgin Islands and other tax Havens so that they could continue trading on Binance. But why would these U.S Trading firms go through so much trouble to set up Shell companies just to trade on Binance.

Binance gives their VIP clients, which includes high frequency trading firms, lower latency access, and exceptions to Binance default order messaging limits. This allows them to execute trades a few milliseconds faster than regular Binance customers. While a few milliseconds might not sound like a lot for high frequency, Traders a small Advantage can add up very quickly. This two-tiered system allows the Crypto, hedge funds, and other VIP clients to systematically take advantage of the individual investors they're trading against.

But CZ wasn't happy to let the VIP clients have all the fun for themselves. According to the Cftc investigation, CZ owns 300 Binance trading accounts which were internally referred to as house accountants. He uses these accounts to trade against Binance customers. It's probably safe to assume that these house accounts get the best execution speeds and lowest trade latency of all, but stacking the cards against non-vip customers is just the tip of the iceberg.

Insofar as Binance's illicit activities, the relaxed know your customer protocols have made Binance one of the top choices for cyber criminals around the world to launder their ill-gotten gains. When police are investigating a suspect, they often have the authority to temporarily freeze the suspect's bank and brokerage accounts for 24 hours. Binance instructed the VIP customer service team Then such circumstances As soon as the account is unfrozen, they are to contact the VIP client and inform him or her that their account has been frozen and is being investigated by law enforcement. They are not allowed to tell the client to run, but they are smart.

They'll get the hint. Basically, they're helping their VIP clients to evade arrests if they're being investigated. This shows the type of clients that Binance catered towards and it gets even worse. The Hydra Market was a Russian language dark web Marketplace that operated between 2015 and 2022.

This website connected buyers and sellers of Narcotics money laundering services and other illicit products. It was one of the most successful dark web marketplaces in history, generating over 5 billion dollars of lifetime sales. According to a Reuters investigation between 2017 and 2022, Binance facilitated at least 780 million dollars worth of hydro-related transactions. Binance has consistently denied that they are a Haven for illicit transactions, but the Cftc alleges that Binance Executives at the highest levels knew otherwise.

In 2020, a compliance employee at Binance notified Binance's Chief compliance officer Samuel Lim about a customer who recently executed 5 million dollars of Highly suspicious transactions. He asked Lim if they should off-board the client or just tell him to delete his existing account and make a new one limb. Responded: Quote: Let him know to be careful with his flow of funds especially from Darknet like Hydra he can come back with a new account but his current one has to go. It's tainted, unquote.

So when they suspect a customer is transacting on illicit dark web marketplaces like Hydra instead of reporting them to the authorities, they helped to cover it up foreign for the past few years. The crypto economy is operated like the Wild West with little to no regulatory oversight, but this unregulated party is now coming to an end. Many Crypto Advocates including Coinbase CEO Brian Armstrong complained that if Regulators crack down on Crypto, they will be stifling Innovation including the Us at a competitive disadvantage compared to other crypto-friendly jurisdictions. However, there is very little evidence to support this claim.

Perhaps the single most Bitcoin friendly country in the world is El Salvador which has even gone so far as to declare Bitcoin as legal tender. Their Bitcoin experiment has been a complete disaster and the country is now on the brink of bankruptcy. You can learn more by watching this video here. Other crypto bowls like Kathy Wood say that crypto will disrupt the traditional banking industry.

At the 2022 Bitcoin conference, she said banks have a big problem. they're losing talent to crypto, so they're having to raise wages to attract talent and they're also losing business to defy lending and saving. A law of it is taking place in defy right now. As you usual, Kathy Wood was dead wrong.

In 2022, the crypto industry laid off over 5 000 workers and these layoffs have accelerated in 2023. And as we've seen with the Ave example, D5 is only useful for crypto speculators to take on Leverage. It has zero connection to the real economy. The idea that D5 poses any competitive threat to traditional Banks is absurd.

As we've said on this channel many times, the entire crypto industry is a giant casino with zero economic utility. And it's not just us saying this. The Bank of International Settlements conducted a study and found an almost one-to-one correlation between the price of Bitcoin and the number of daily active users on crypto apps. This indicates that the vast majority of people who own crypto are speculators who buy high and sell low.

This explains why an estimated 80 percent of crypto investors have incurred a net trading loss. Hopefully this serves as a wake-up call to crypto investors. The crypto industry is not your friend, and the sooner that we, as a society can throw this disastrous crypto experiment into the trash bin of History the better. Alright guys, that wraps it up for this video.

Crypto is a controversial topic and if you disagree with any of the points we made in this video, feel free to let us know in the comment section below. As always, thank you so much for watching and we'll see you in the next one. Wall Street Millennial Signing out.