Coinbase, Do Kwon, Lindsay Lohan Are All Ensnared by Widening Crypto Dragnet

Last year’s crypto-market meltdown triggered a series of bankruptcies that almost completely reshaped the digital-asset industry. This year, government watchdogs appear to be arriving on the scene to finish the job.

(Bloomberg) — Last year’s crypto-market meltdown triggered a series of bankruptcies that almost completely reshaped the digital-asset industry. This year, government watchdogs appear to be arriving on the scene to finish the job.

The past week saw the industry hit with another deluge of enforcement news, from the SEC’s threat to take legal action against Coinbase Inc. and its suit against the Tron blockchain network to the apprehension of crypto fugitive Do Kwon. Even celebrity crypto promoters like actress Lindsay Lohan and rapper Soulja Boy got caught up in the crackdown. 

As the headlines piled up, the developments put a lid on a rally in Bitcoin that had been pushing the oldest token back up toward the closely watched $30,000 level. A glitch Friday morning at crypto exchange Binance took spot trading offline for more than two hours on a platform whose market dominance has only grown as other players have folded, adding to the sour mood. Bitcoin drifted around $27,500 on Saturday.

The collision course between the US government and crypto true believers’ vision of a system where money can be freely exchanged around the world without “censorship” by authorities was accelerated by the failure of the Terra blockchain’s stablecoin to maintain its $1 peg and the bankruptcy of FTX last year, which combined to vaporize almost $2 trillion of digital wealth. This month’s implosion of crypto-friendly banks Silvergate Capital Corp. and Signature Bank has added fuel.

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At the center of much of the recent actions is the SEC’s decision to treat many cryptoassets as securities that must be registered with the agency and subject to all the regulations that go along with it. Needless to say, digital-asset aficionados were livid with much of the week’s news flow, especially when it comes to publicly listed Coinbase, which says it has repeatedly tried to engage with the regulator to no avail. 

“A reprehensible amount of resources and brainpower have been spent in the US trying to engage with this SEC and trying to create substance and a path out of the wraithlike comments issued by the agency,” Sheila Warren, chief executive of the Crypto Council for Innovation trade group, said in an email. “Meanwhile, most other major economies are actively in productive consultation with experts about how to land the regulatory plane.”

The treatment of many crypto coins as securities means the SEC is testing it authority, leaving those caught up in its sights an option: capitulate and pay a settlement with the regulator, or fight it in court. Coinbase CEO Brian Armstrong has made it clear that the company will fight the complaint, tweeting that the process will prove “that the SEC simply has not been fair, reasonable, or even demonstrated a seriousness of purpose when it comes to its engagement on digital assets.”

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Six of the eight crypto-touting celebrities – including Lohan and YouTube prankster-turned-boxer Jake Paul – decided just to cut the SEC a check after the regulator accused them of touting coins traded on the Tron blockchain without disclosing they were being paid to do so. 

DeAndre Cortez Way – aka rapper Soulja Boy – and singer Austin Mahone haven’t settled. The celebrities are keeping quiet about the whole issue. (For what it’s worth, the only thing Soulja Boy was hawking this week on Twitter was a pink hoodie featuring a cartoon image of his smiling face. That is almost definitely not a security.) 

Of course, some of the crimes being alleged went beyond just dealing in unregistered securities. The case against Justin Sun and three of his companies connected to the Tron blockchain also involves accusations of fraud and market manipulation that artificially inflated the trading volume of tokens by encouraging employees to do more than 600,000 so-called wash trades. Sun wrote on Twitter that he believes the SEC’s complaint lacks merit.

Do Kwon’s indictment in the US, which came shortly after his arrest Thursday in Montenegro, also revealed that the government believes the collapse of his Terra blockchain project was more than just a $60 billion accident. According to prosecutors, Kwon also allegedly engaged in market manipulation and deceived investors about certain aspects of the project. His US lawyer did not respond to a request for comment from Bloomberg.

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By the end of the week, it had all started to look like a drama that could be called “Law & Order: Web3.” So what will the next episode entail? Many industry watchers are bracing for more shoes to drop.  

“Overall, I expect we will see more enforcement news like this in the future given we are operating in an environment with little or no regulatory guidance,” said Duke University finance professor Campbell Harvey. 

For the crypto optimists searching for a silver lining, it’s all about looking at the future instead of the dwelling on the ugliness of the past week. The latest bout of drama in the market “tells us nothing,” according to Aaron Brown, a crypto investor who writes for Bloomberg Opinion

“Useful attention should be directed to the new ships preparing for departure, the ones who will lead the next boom,” he said. Many of the developments of the past week were just “the flotsam and jetsam washing ashore long after the storm has passed.”

Or maybe Soulja Boy put it best back in his MySpace days when he rapped: “On the internet, got ‘em jumpin’ off the wall.”

–With assistance from Emily Nicolle.

(Updates priecs.)

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