The Buzz about Binance

Six questions the SEC should answer now

Ric Edelman: It's Friday, July 7th. Before we get to the buzz about Binance, let’s talk generative AI.

Pricewaterhousecoopers has announced it's going to spend $1 billion over the next three years into generative AI. They're working with Microsoft and OpenAI. OpenAI makes ChatGPT and Microsoft invested $10 billion into that company. PwC says it's going to automate a lot of its tax audit and consulting services. It's not only going to automate tax prep; it's going to show its clients how they can automate their internal functions as well. This technology can quickly write reports and prepare compliance documents, can analyze and evaluate business strategies, identify inefficiencies in operations, and create marketing materials and sales campaigns.

Already thousands of companies are using OpenAI. From startups to multinational conglomerates, we're talking about customer support, conversational chat bots, data summarization writing, and PwC is not the only one. KPMG and Ernst and Young are also investing in generative AI. Intuit, which owns TurboTax, they're developing the tech as well. Pretty soon, accounting, tax preparation, auditing and other financial services will all be done by computer. We're not going to need human tax preparers anymore or auditors. The data can be compiled, reported and analyzed far faster and far more accurately than humans and at far lower cost.

In fact, there's a new survey of 500 corporate executives. 53% of them say they're spending money on ChatGPT technology. The global market for generative AI is going to hit $43 billion by the end of the year. It's going to be $100 Billion by the end of 2026. That's a 32% annual compound growth rate. For now, PwC says they're not going to fire anybody. Instead, they're just going to give them new jobs to do.

But what's the future for your career and frankly, what's the future for investment opportunity? You should look right now at the Global X AI and Technology ETF, Symbol AIQ and the Global X Robotics and Artificial Intelligence ETF, symbol BOTZ. Generative AI. This is huge. And you better talk about this with your children who are thinking of going to college. Why anybody would go study accounting. I'm really not so sure if that makes a lot of sense long term.

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Ric Edelman: A couple of weeks ago, I hosted the fifth Annual VISION Conference in Austin presented by my company, the Digital Assets Council of Financial Professionals. DACFP Vision is the longest running Digital Assets Investment conference that's specifically for financial advisors and accredited investors. And at this year's conference, it was our biggest ever attended by more than 125 financial advisors and investment professionals from all over the country. At the event, I presented a session updating all the advisors about the SEC lawsuits against Binance and Coinbase, and I wanted to share that entire conversation with you today. Here it is, unabridged and uncensored.

Let me launch into this update for you. I'm sure you've been following to some degree the lawsuits, but we're finding that there's a lot of confusion among folks between these two lawsuits. The fight against Coinbase has been going on for quite some time to the point that Coinbase has countersued the SEC. This latest lawsuit is raising the fight a little bit. So let me elaborate on that for you.

First, we're going to talk about Binance. Over the past several years, Binance has generated a massive amount of revenue. This is rather incredible to create a brand new business and have it produce that kind of volume. Binance operates outside the US, which is why this is not a household name. The company offers trading options that are illegal under US law regarding options and futures, shorting leverage, margin and so on.

And if it had maintained that and kept doing it in that way totally outside US jurisdiction and it wouldn't even be an issue. But Binance has admitted as early as 2019 that it was getting 16% of its revenue from US customers, and the result of that is that this is very much falling under US jurisdiction. And to respond to this concern and allegation from the SEC that they are in fact dealing with American investors, Binance formed Binance US and said, ‘We're going to create a US subsidiary and we'll leave it at that, so US American citizens do that and our foreign will do this’. And the SEC says Binance US is fake.

In fact, Americans have been trading on Binance offshore exchange, even though they've got Binance US. And that is really at the core of the issue. There's nothing new about the challenges that Binance has been experiencing, and in hindsight, it looks incredibly reminiscent of FTX. Their own company's auditors have cited significant deficiencies and material weaknesses, including and this is the damning death knell co-mingling customer assets with company funds. That, beyond anything else, is the real issue.

According to the SEC's lawsuit, they say that they have a message from a Binance executive saying we can't be seen to have US users, but in reality we need to get them. And in 2020, they have emails, according to the SEC's complaint, that Binance helped Russians launder money.

So the lawsuit is really clear. The SEC has filed 13 charges against Binance and a massive lawsuit. The allegations include misrepresentation of trading controls. They say that over a three year period from 19 through 21, the trading firm and the British Virgin Islands, controlled by the CEO, who sees, as he's known, received more than $12 billion in client assets and that they allowed US customers to trade on the platform. It's an unregulated exchange issuing unregulated securities and that they used wash trading to inflate the trading volume to make the company look more profitable and more active than, in fact, it really was.

What's really interesting is that there is also a lawsuit against the company by CFTC that was filed in March. Both of these lawsuits are trying to get both the company and [founder Changpeng Zhao] “CZ”  permanently barred from ever doing business in the United States. [SEC Chair] Gensler made this quote, “We allege that CZ and the CEO of the company and Binance engaged in extensive web of deception, conflicts of interest, lack of disclosure, and calculated evasion of the law.”

It's virtually the same thing that he said about Sam Bankman-Fried. And the Justice Department is expected to file criminal charges for failure on their AML. But he lives in a country that has no extradition treaty. So he has gone where the US criminal prosecutors can't get him. What is interesting to note is that in the first 24 hours of the announcement of the lawsuit, $800 million left Binance. And it's now well over a billion that has left the company.

And that's kind of understandable. If you had an account at Binance and you're hearing this news, I'm not so sure you're going to leave your money there. And then one day after the SEC filed its lawsuit against Binance, the SEC filed its lawsuit against Coinbase. Both of these companies are accused of these three misdeeds, unregistered securities broker, unregistered securities exchange, unregistered securities.

What is interesting, though, is that Zhao is also being accused of civil fraud. Brian Armstrong [Coinbase CEO] is not. So there is a world of difference between the two. What we talked about earlier today and what I'm finding so annoying is that the SEC appears to be working hard to link the two companies together in the public's mind and in legislature's mind in Congress because of the SEC's long ongoing fight against Coinbase, when in fact, what is going on with the two companies is radically different. One of them, it certainly appears that Binance is a fraudulent organization as FTX was.

Coinbase, on the other hand, is simply a company that is struggling with a lack of clarification regarding the rules. And there's a dispute over whether or not they're obeying rules. So one of them is clearly a fraud conversation. The other one is simply a business operations conversation. And that list of unregistered securities, there it is between the two lawsuits, Binance and Coinbase, 13 of them in the Coinbase case, you probably recognize an awful lot of these, but that is only the latest.

[referring to slide] This is the full list that the SEC has declared are unregistered securities. There are 67 of them that the SEC has so far said are unregistered securities. So I have a few questions about all of this.

First, did you notice what's missing from that list of 67? Bitcoin and Ethereum. The SEC did not name either one as being an unregistered security, and the general attitude is that they didn't want to go after the big boys because we all know that 60 to 70% of the entire market cap of the crypto space are in those two coins, and it would raise the specter to massive numbers of investors in the United States, including particularly institutional investors. There are a lot of institutions, endowment funds, pension funds, let alone hedge funds and family offices that own crypto, but specifically bitcoin and Ethereum. They don't own anything else. So these big institutions, look at MassMutual that's invested $100 million into bitcoin, the SEC can do whatever it wants to these others, but as soon as they target bitcoin, this becomes an issue for MassMutual.

So why is it that the SEC hasn't gone after Bitcoin and Ethereum? Is it because they agree they're not securities? Or is it that they are just not confident enough that they want to pick a fight with the two biggest cryptos?

The second question I have is this. This is really interesting. The SEC has accused Coinbase of selling, for example, Solana, which it says is on that list of 13 unregistered securities. But the SEC has not gone after the Solana Foundation, which issued the token. So why is that? Why are they accusing Coinbase of selling something when they haven't accused the issuer of doing something wrong? It seems inconsistent.

And you have to wonder, is there a particular vendetta against Coinbase as opposed to the Solana Foundation? And that story is replicated with all of the unregistered security allegations. Any of your kids play Roblox and have your kids asked you to give them money so they could buy some robux so that they can buy, you know, all the tools and the skins and the skills and all that kind of good stuff.

Well, think about this for a second. Is robux a security? If you look at it on the Howey test, you just might wonder how is robux not a security? If Solana is, why isn't the SEC going after them? In fact, by extension. How about airline miles? Where is this going to stop and how is it that the SEC is parsing out its decision making of what is and what is not and who they're engaging in enforcement activities against? The inconsistency in the rule making and in the enforcement actions seems to be incredibly blatant. Remember I mentioned a moment ago that $1 billion has left Binance as a result of the lawsuit. What's really interesting is that half of the money that left went into stablecoins.

In other words, there was a massive outflow of assets from predominantly bitcoin and Ethereum into stablecoins. A similar example would be in the 2008 mayhem or in the 2020 mayhem. People sold stocks and moved to money market funds. That's what this has basically happened. Half the money leaving the market and going into cash. You've noticed some price weakness in the last week [week of June 5]. This is partly why, because of investors saying, ‘I'm not sure what's going on’. Once all of that settles down, that money's going to go right back into those digital assets. It'll go back, if not into Solana and the other 13. It'll go into bitcoin and Ethereum. This is what many are arguing, the beginning of another bull rally in the marketplace because investors have been spooked and that will only last for a temporary period of time.

My fifth question is this: If this persists, does the SEC fail to realize that what they're really doing is not killing crypto? They're killing crypto companies, or at least the ability for crypto companies to operate here in the US. Coinbase has already opened a business in Bermuda. They're actively talking with London regulators. Gemini has applied for a license in the United Arab Emirates. Bittrex has already shut down its US operations and Andreessen Horowitz announced that they're going to be opening a London office this fall to support crypto startups, what they would traditionally have done in San Francisco. They are instead shifting to London, where it's a more favorable regulatory environment.

This whole thing is very reminiscent of what happened when President George H.W. Bush [41], eliminated stem cell research here in the United States. That didn't kill stem cell research. It just chased all the scientists to South Korea and Israel. And the research continued and we simply lost our leadership role. And that new scientific innovation, that's what we are on a path to occurring as a result of this. We're not going to kill crypto. There's nothing Gary Gensler can do to accomplish that. This is a global asset that trades 24 over seven with 400 million people around the world owning it. The only thing that Gensler can succeed in doing is chasing the crypto community outside the United States. And if that happens, the innovation and development will simply occur elsewhere.

And number six, this is what Gary Gensler said on CNBC just last week. “We don't need more digital currency. We already have digital currency. It's called the US dollar. It's called the euro or it's called the yen. They're all digital right now.”

Why does he care and who is he to make the statement? “We don't need more.” Imagine the Chair of the FAA saying we don't need more airlines. It's not for the government to determine that we do or don't need more of something. That's for the market to decide. It's the government to make sure that the markets are operating fairly with proper transparency for all of the participants not to decide whether or not we do or do not need more of something.

And this is really at the core of where the SEC is coming from. Gensler has an opinion about the marketplace and is trying to exert that opinion on the marketplace rather than trying to facilitate it. He's acting like a player coach instead of the referee, and that's not the role that he's in. And so the appropriate response comes from the chief legal officer of Coinbase who said the solution is legislation, not litigation. That was reinforced by Glenn Thompson, the chair of the House Agriculture Committee, who has co-sponsored the new crypto bill, who said the same thing about Gary Gensler: ‘Regulation by enforcement’.

It is not an appropriate way to govern a market, and that has led to the Digital Asset Market Structure Act, which is the bill that was jointly released by the two committees Financial Services and Agriculture, one overseeing the SEC, the other one overseeing the CFTC. Here are the key elements of that bill.

First, it would limit the SEC's jurisdiction to digital assets that are offered as part of an investment contract. That phrase investment contract is straight out of the Howey Test. So this would put a very clear fence around the SEC's jurisdiction.

Second, it will permit secondary market trading of digital commodities, commodities under the CFTC if their IPO was part of an investment contract. So this is making a clear path to saying if you can have bitcoin futures as a commodity, you can have bitcoin as an ETF. And so this is a very clear statement that eliminates Gensler's ability to reject those applications.

Next, it says that digital asset issuers that demonstrate that their digital assets operate on a decentralized network will be considered a commodity falling under the CFTC. And if the SEC wants to object, it's got to provide a detailed analysis of its reasons. So Gensler is removed as the assumed default regulator and provides it to instead the CFTC. And the key is to demonstrating that they are operating on a decentralized network and most coins would in fact be able to meet that definition. It would also prohibit the FCC from prohibiting trading platforms merely because they trade digital assets. This would remove the burden from Coinbase, Gemini, Kraken and so many others. It would also allow these platforms to offer digital commodities and stable coins. So it provides a lot of the clarity that we currently don't see. And it would require the FCC to modify its rules that would allow broker dealers to custody digital assets, something that broker dealers don't know they're allowed to do at present, which is a big stumbling block.

Schwab, for example, has said that they would love to trade bitcoin and Ethereum and others, but they don't know if they're allowed to. They don't know what they have to do in order to comply. This will provide the regulatory clarity for organizations like Schwab to go ahead and do exactly that.

And it also finally requires the FCC to modernize its regulations for digital assets. Gary Gensler has said repeatedly, we don't need any new rules. We have all the rules in place. That's nonsense. Those rules were written when those laws were done with pen and paper. We are now in a digital age. We need to update this for the technology, and the law would require the FCC to do exactly that: Create a digital commodity exchange framework that is very similar to the Commodity Exchange Act, so they don't have to start from scratch. We understand how the CEA works and this would operate very similarly. The chair of the CFTC says he's encouraged by the bill's approach and says they can implement it in as little as 1 or 2 years.

So this is not the heavy lift that some people fear that it would be. So we're pretty optimistic that if this legislation goes through, we're going to have the regulatory clarity before too long. But as you heard today from several of the panelists, as well as Congressman Hill, whether or not we're going to get passage this year is uncertain because of the political environment. And if it doesn't happen this year, as we go into 2024 and the election season, it could be the new Congress, the new president in 2025 that are going to lead this. So we could be two years away from passage and then another two years away from implementation of the rules.

This could be 2027 or toward the end of the decade before we have that clarity. Everyone is pretty much in agreement that once that clarity is in place, the barn doors will come wide open and everybody in the financial services industry will be easily and happily engaging, and that will bring in massive amounts of new assets. The new assets will represent new levels of AUM that will translate most likely into higher crypto prices.

And so the message for you is you have a choice. You can either wait for all of that to happen and invest then, or you can invest now banking on that premise. So it's your choice. You can invest when bitcoin is 26,000, or you can wait for bitcoin to be 100,000 before you invest both on their way to 250,000. So the choice is up to you. Those are a lot of ifs and the timelines are highly speculative.

Obviously it can all go in the other direction, especially if this legislation wastes to 2025 depending on who wins the presidential election and who controls the two chambers of Congress. So we're going to have to make those decisions for ourselves and our clients. This is a big reason why I recommend a 1% allocation. If you're wrong, it's not going to be a big deal. But if you're right, it could have a real material impact on the overall return of the portfolio. We've got a few minutes for questions, if anybody has any. Yeah.

Conference Attendee: Hi, Ric. I've got two unrelated questions. First one is I would love to hear your thoughts or comments on Gary Gensler's offer in 2019 to be a paid advisor to Binance.

Ric Edelman: I'm not sure that people realized in 2019 the extent to which Binance was operating, the way we now begin to recognize that it is any more than we were aware of FTX's business activities. So I'm not terribly shocked. Binance was until all of this. the world's largest exchange; FTX, was second. So if you're a former government official and a former MIT professor looking for a job, I think it would make sense to offer your services to Binance. I'm not sure, knowing what we now know, that he would do it, I think it would have been far more interesting if he got the gig. What would he have done with the information he obtained as a result of the gig? Would he have ruined his reputation or would he have become a whistleblower? So I think that would have been a whole lot more interesting. Or maybe he would have gotten so filthy rich he'd still be there and we'd be happily doing our own thing.

Conference Attendee: Second question, just a quick follow up. What do you think is the true motivation for the US government going after Coinbase? And really what I'm fishing for here is, is this a setup to smooth the way or to take out the competition for a US CBDC?

Ric Edelman: No, I don't think CBDC is related to crypto exchanges any more than the dollar is a threat to the New York Stock Exchange. You've got dollars, you've got stocks. Whether those dollars are digital and the stocks are tokens. Digital, I don't think is relevant. So I don't see a connection between CBDCs and stablecoins, which are one category and digital assets and tokens in another category. I don't see a link.

Why are they going after Coinbase? Because they are the biggest US exchange, the public exchange. They have 100 million accounts more than Schwab, TD Ameritrade, Interactive Brokers and E-Trade combined, and they represent an existential threat to the existing infrastructure of the financial services industry. I am convinced that Warren Buffett and Jamie Dimon oppose crypto because they represent an existential threat to their businesses. Remember that Warren is the biggest shareholder of Wells Fargo.

And so I think that they're circling the wagons just to protect their infrastructure. And that's not at all uncommon. When electric trains came about, it took over 50 years for the industry to stop paying the railroad men who were operating steam locomotives for 20 years. You had elevator operators in fully automated elevators. They just sat there pushing the buttons that we now push because people are slow to change technologies. And the challenge is that in the old days, these kinds of innovative changes occurred generationally.

These changes are now occurring annually. Look at the speed of the development of ChatGPT, of robotics, of neuroscience and big data and 3D printing. And so the infrastructure is threatened with obsolescence and they don't know what to do about it. So I think the conspiracy is a natural circle. The wagons protect ourselves, protect our shareholders, and they're not really focusing on much else. And they have a lot of lobbying power and they try to get Washington to do their bidding. They succeed for a while, but not long term. In the end, nobody cares about horse and buggy manufacturers going out of business except the horse and buggy manufacturers. So they're able to slow down the advent of the car, but they can't stop it. And this is where we are today with crypto.

Conference Attendee: I would ask your opinion about this. It's easy to understand why Charlie Munger, as old as he is, cannot learn this new technology. I hope I don't seem mean about that. But if Gensler really was an MIT professor, he surely understands this quite well. Why is he so hostile?

Ric Edelman: I'm not sure Charlie doesn't understand the tech. I think he does. I think he's concerned about the impact on the banking infrastructure that exists today. I also think that he's focusing mostly on the price volatility. Let's face it, the first time you look at bitcoin, you all went through this. I know I did the first time. You look at bitcoin and you look at its price volatility and it sure looks like tulip bulbs and Beanie Babies. And if you simply stop there because history tells us if it looks like a duck, it probably is. It's easy to say this thing is going to end badly. This is nothing but a Ponzi scheme or just a pump and dump and just go no further. There's no underlying technology to Beanie Babies. There's no underlying technology to flowers, but there is an underlying technology to Bitcoin called blockchain.

I got involved in Bitcoin back in 2012 and back then it was all about Bitcoin. It wasn't until 2014 that people started to say, “Wait a minute, what's this blockchain thing?” Because we were so excited and motivated focusing on the price movement of bitcoin in 2012 and 2013, as bitcoin went from $10 to $1000, nobody paid much attention to how was that happening? And then we started to do that and people started to say, “The excitement here is not bitcoin, it's about blockchain.” And even today I encounter people who say, “I'm not sure I understand Bitcoin, but I'm excited about blockchain.”

And you heard Roger talking about it with me this morning that if you like the Polygon blockchain, you have to be enthused about Matic, the coin. It's sort of like saying if you want to go into a casino but not use casino chips. That doesn't make any sense. Or I like the iPhone, but I don't like iPhone apps. It doesn't make any sense. So I think that too many people are looking superficially at the price movement and not the underlying tech. And when they do look at the underlying tech, then they begin to understand the bigger picture.

The other half of your question is to why is Gensler doing this? Because he's not a dumb man. He's clearly an intelligent individual and experienced, knowledgeable about the subject to teach at MIT, there are a wide variety of speculations as to why he's doing it. The only one that I can share with you the story that I've heard the most often, and I have no way of verifying or validating it. But when I wander Capitol Hill and I talk with folks and lobbyists and staff members and so on in DC, the most common story, including from SEC staff, is that Gensler wants to be Secretary of the Treasury. And a key member of the Senate Finance Committee that has an influential role in who is going to be the next Treasury secretary is Elizabeth Warren.

She hates crypto and so Gary is doing her bidding and helping to crush crypto. I have no idea if that story is accurate. Whenever I mention it to folks, they say, I've heard the same story and I say, Is it accurate? And they're like, I don't know. Gary doesn't give interviews and he hasn't revealed what his career aspirations are, clearly has aspirations. Some leave government service and they join corporate boards. They go back to where they came from, back to Goldman, back to JP Morgan or whatever, and they make a gazillion dollars. Others advance their political or federal careers. So I don't know. But that's the most common version of the story that I hear. You could argue that it doesn't make a lot of sense.

On the other hand, if you're a conspiracy theorist, you're exactly convinced that's what's going to happen. So. So we'll see. That's my buzz about Binance at the fifth annual DACFP VISION Conference in Austin. In the coming weeks here on the podcast, I'll be presenting you with additional conversations and interviews from the conference. Right now you can check out the photos and other highlights from VISION. It's all on my Facebook , Twitter and Instagram pages.

Ric Edelman: Hey, if you've got a little downtime this summer, who doesn't catch up on past episodes of this podcast at TheTruthAYF.com? You know, we cover the five personal finance topics that matter most longevity, retirement security, exponential technologies, digital assets and health and wellness. It's the TAYF.com.

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