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US Securities and Exchange Commission (SEC) Chairman Gary Gensler's <a href="https://www.sec.gov/news/testimony/gensler-testimony-house-financial-services-041823?ref=blockhead.co" rel="noopener noreferrer nofollow">congressional testimony</a> last week was big news. But the hearing itself contained little new information and, as usual, most of the questions were designed to get the questioner on TV and in front of their voters. This is why Rep. Tom Emmer, for example, kept asking <a href="https://www.youtube.com/watch?v=TtHMDhDr1vE&amp;t=&amp;ref=blockhead.co" rel="noopener noreferrer nofollow">questions and cutting off the answers</a>: the answers were not the point. That is what these hearings are about.
Gensler's prepared testimony, when paired with the SEC's charges against Bittrex last week, tell us where the Coinbase saga is likely going. In the written pre-prepared testimony Chairman Gensler said, in a section entitled "Crypto":
<blockquote>
 Right now, unfortunately, this market is rife with noncompliance. This noncompliance not only puts investors at risk, but also puts at risk the public’s trust in our capital markets.
</blockquote>
He makes decisions at the largest securities regulator and clearly thinks there are a lot of problems. The SEC is only empowered to charge people and firms and not to adjudicate disputes so this only means more charges are likely coming. But their track record so far is pretty good. 
The hearing itself contained few if any specifics and, as is usually the way in these matters, we need to look to the charges the SEC files to get details.
<h2 id="header-0">Bittrex's Overall Business</h2>
And the <a href="https://www.sec.gov/litigation/complaints/2023/comp-pr2023-78.pdf?ref=blockhead.co" rel="noopener noreferrer nofollow">Bittrex charges</a> contain as lot of detail that helps in this direction. One major theme is that Bittrex merged together three normally separate functions in a way that created all manner of compliance problems:
<blockquote>
 These regulatory provisions have led, in turn, to the separation of key functions related to securities transactions—including those carried out by brokers, exchanges, and clearing agencies—in part to better protect investors and their assets from conflicts of interest. By collapsing these functions into a single platform and failing to register with the SEC as to any of the three functions, and not having obtained any applicable exemptions from registration, Bittrex has for years defied the regulatory structures and evaded the disclosure requirements that Congress and the SEC have over the course of decades constructed for the protection of the national securities markets and investors.
</blockquote>
The first thing to note is that this merging of exchange, broker, clearer and custodian is standard in crypto. Everyone in traditional finance knows this. These charges are overtly staking out a position that essentially every platform that calls itself a "crypto exchange" and operates in the United States is non-compliant.
Yes in theory it might be possible to merge all of these operations, navigate the inevitable conflicts and interest and maintain all the licenses. But no crypto exchange even holds all these licenses so none of them can be compliant.
<h2 id="header-1">Penalties</h2>
In this case the SEC is charging a few Bittrex entities and the founder/long-time-CEO. This is reasonably standard. But the financial details are notable. The SEC alleges that Bittrex generated billions in revenue from these activities:
<blockquote>
 All the while, Bittrex earned at least $1.3 billion in revenues from, among other things, transaction fees from investors (including U.S. investors) it has placed at significant risk while servicing them in these unregistered capacities.
</blockquote>
And William Shihara was paid a lot of money out of those fees:
<blockquote>
 Like Bittrex, Shihara—who was acutely aware of potential SEC scrutiny of these activities—was financially motivated to make more assets available for trading on the Bittrex Platform in order to increase Bittrex’s revenues and, in turn, his own compensation, which totaled at least $130 million.
</blockquote>
Again, as is pretty standard, the SEC wants both profit disgorgement (i.e. paying the government your past profits) and penalites. And the manner in which they want those penalities tells us something about where the Coinbase story may be going. Specifically the SEC wants a judgement &nbsp;"Ordering Defendants to disgorge on a joint and several basis all ill-gotten gains."
"Joint and several" is a legal term that means "everyone involved is on the hook for the full amount." This does not mean the government gets to collect once for each defendant. Rather it means they can sue any of them for the full amount and the defendants can then sue each other to achieve some proportionality.
So in this case, clearly, the threat is that they come after Shihara for billions of dollars. This is a message to Coinbase's executives.
<h2 id="header-2">The Tokens &amp; What's Next</h2>
These charges also include a list of specific tokens the SEC alleges are securities. The first three are OMG Network, DASH and Algorand. These are all reasonable-sized tokens. And they are all listed on Coinbase.
So the likely next steps are clear. Bittrex's founder is staring at being personally liable for billions of dollars – which he of course will not be able to pay and will end up bankrupt – unless he finds a settlement. And that settlement will need to agree some large tokens that are traded on Coinbase are securities.
Algorand goes a bit further. Essentially every crypto exchange lists Algorand. Certainly everybody listed and traded Algorand back in 2021 when the market cap was over US$ 10 billion. The SEC alleges Bittrex's non-compliant activities extend back to 2014. Even delisting now will not save an exchange.
In many ways this looks more like the efforts around <a href="https://www.sec.gov/news/press/2011/2011-233.htm?ref=blockhead.co" rel="noopener noreferrer nofollow">prosecuting Raj Rajaratnam</a> than a standard securities law issue. The government is slowly but surely rolling up smaller players and scoring small wins, building each case on the prior ones. And it feels like we are approaching that moment when the US government charges the largest US-based players in the space and we find out how much of 2021-era crypto will exist in 2024.
We already know it is not 100% as so many players have disappeared. And it is probably not zero. But it is looking more and more like crypto markets will not involve much unregulated onshore trading in the future.

Bittrex as Coinbase Prelude

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