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<img src="https://www.blockhead.co/content/images/2023/03/SEC1.jpg" />This week saw three major US government actions through which we can learn a lot: Coinbase&#39;s Wells Notice, Do Kwon&#39;s arrest and the SEC charging Justin Sun. These are long and complex cases. So here we are going to focus on one simple point in each case that tells us something about what the government is doing or how the industry is reacting.The common theme here is that, for at least some of the allegations, there do not appear to be real defenses. And some of what is being presented as &#34;defense&#34; is so unserious that it will likely not be presented in court.<h2 id="header-0">Coinbase</h2>Coinbase disclosed their Wells Notice alongside a long defense in the form of a blog post. Some of the arguments here reveal a lot about the strength of their position. In particular, in a section entitled &#34;The SEC will not let crypto companies &#39;come in and register&#39; – we tried.&#34; Coinbase writes:<blockquote>our staking and exchange services are largely unchanged since 2021, when the SEC reviewed our S-1 and allowed us to become a public company. Our core business model remains the same.</blockquote>Read more: <a href="https://www.blockhead.co/2023/03/23/coinbase-gets-wells-notice-ceo-sells-stock/" rel="noopener noreferrer nofollow">Coinbase Gets Wells Notice, CEO Sells Stock</a>This passage is true. The SEC did review Coinbase&#39;s <a href="https://www.sec.gov/Archives/edgar/data/1679788/000162828021003168/coinbaseglobalincs-1.htm#i86a9d9b35e45447ea6eb369e5dcf1e6a_1321" rel="noopener noreferrer nofollow">S-1</a> and, eventually, approved their becoming a public company. And the SEC <a href="https://www.sec.gov/education/smallbusiness/goingpublic/registrationstatement" rel="noopener noreferrer nofollow">explains clearly</a> the purpose of these sorts of registration statements as:<blockquote>the legal offering or “selling” document that must be delivered to everyone who is offered or buys the securities. In the prospectus, your company must clearly describe important information about its business operations, financial condition, results of operations, risk factors, and management.</blockquote>It is a disclosure process and the SEC&#39;s role is to ensure disclosure is sufficient. So let&#39;s dig in to Coinbase&#39;s description of their business:<blockquote>In general, we seek to ensure that crypto asset transactions on our platform do not constitute futures, swaps, security-based swaps, other derivative products, or retail leveraged commodity transactions. Given our novel business model and uncertainty regarding application of some of these laws and regulations, we may become subject to regulatory scrutiny or legal challenge with respect to our compliance with these requirements.</blockquote>So the SEC approved a business model in which Coinbase tried to avoid listing securites, disclosed there was a risk they might be anyway, and warned investors that would constitute a problem. It would appear – both from the S-1&#39;s approval and the recent Wells Notice – that the SEC agrees entirely with that paragraph.<h2 id="header-1">Do Kwon</h2>One of Do&#39;s products was the <a href="https://www.mirror.finance/" rel="noopener noreferrer nofollow">Mirror Protocol</a>. To quote the whitepaper:<blockquote>Mirror Protocol has taken a big step in allowing users to gain price exposure from synthetic assets that have prices tied to a real world exchange-traded security</blockquote>So, to the extent Mirror was used inside the United States, it was engaged in unregistered securities trading. The SEC <a href="https://www.sec.gov/litigation/complaints/2023/comp-pr2023-32.pdf" rel="noopener noreferrer nofollow">already charged</a> a bunch of people, including Do, with that. But the criminal complaint goes further:<img src="https://academy-public.coinmarketcap.com/optimized-uploads/45613c2114fc4b559aabf9018ba30231.png" />That, presumably, refers to the now-well-documented faking of Chai-Terra volumes and utility. In plain language the criminal complaint says that not only was Do engaged in questionable unregistered securities activites he was lying on TV to promote that business.Here, too, it is difficult to see a defense. The TV (and podcast) interviews are all over the place. There is widespread reporting on the Chai-Terra partnership involving fake volumes, fake utility and all manner of bad behavior. And Mirror Protocol, by design, generated securities.He cannot even argue these were decentralized platforms after Terra was <a href="https://www.bloomberg.com/news/articles/2022-05-12/terra-developers-halt-new-transactions-on-stablecoin-blockchain" rel="noopener noreferrer nofollow">halted and restarted</a> on TFL&#39;s orders. There does not appear to be a way out of this box.<h2 id="header-2">Justin Sun</h2>This <a href="https://www.sec.gov/litigation/complaints/2023/comp-pr2023-59.pdf" rel="noopener noreferrer nofollow">charging document</a> is amazing more for the near-endless list of events absent any regulatory pushback than the charges themselves. Yes some parts of the Tron ecosystem surely constitute securities. Yes the ICO looked near-identical to myriad other ICOs that have generated legal problems. Yes some of the promoters were all over YouTube and various social media channels promoting things with sometimes-not-entirely-accurate claims.None of that is new information. But the US attorneys that prepared the documents clearly combed this history carefully to make their case. Maybe you think US jurisdiction is questionable here. Except:<img src="https://academy-public.coinmarketcap.com/optimized-uploads/a8ce7a1cff2a4e2c85220a3812656b93.png" />And if that isn&#39;t brazen enough try this one:<img src="https://academy-public.coinmarketcap.com/optimized-uploads/1bfb01ad2640479f9df7552aef42d5a4.png" />How are you going to defend that? Similarly the idea TRX is not a security is laughable. Read the entire document but this paragraph is fairly compelling:<img src="https://academy-public.coinmarketcap.com/optimized-uploads/b9db195dedfe4ee1bb0888208353a59b.png" />Remember the Tron ecosystem hosts a USDJ stablecoin from the &#34;JustStable&#34; ecosystem, a SunSwap decentralized exchange and various other products which include parts of Justin Sun&#39;s name. Calling these &#34;inextricably tied&#34; is mild.Read more: <a href="https://www.blockhead.co/2023/03/23/tron-founder-justin-sun-faces-sec-charges/" rel="noopener noreferrer nofollow">SEC Sues Justin Sun, Lindsay Lohan, Rappers, Pornstar for Crypto Violations</a><h2 id="header-3">And Now?</h2>Each of these cases is packed with allegations where there does not look to be a workable defense. And even if some of the charges can be defended it is looking unlikely all of them can.Coinbase is facing only civil problems. And the likely outcome, as with most SEC cases, is some sort of settlement. But if that settlement significantly reduces the scope of what Coinbase lists the consequences will be wide-ranging.The same can probably be said of the SEC&#39;s actions against Do Kwon and Justin Sun. Some kind of settlement is the likely end and this will give us some good clarity on what conduct is firmly out of bounds.SEC settlements often involve the accused paying back a multiple of what they made from the specific conduct alleged – but a small fraction of what the made overall. The SEC cannot, in practice, go after every single profitable thing someone does. So there is a good chance the civil charges here are settled with a large fine and everyone goes home happy.But the criminal charges against Do raise the stakes. Do has an incentive to provide whatever information he can on anyone to reduce his sentence. He was <a href="https://www.blockhead.co/2023/03/24/do-kwon-arrested-in-montenegro-faces-us-criminal-fraud-charges/" rel="noopener noreferrer nofollow">caught</a> in Montenegro &#34;<a href="https://apnews.com/article/crypto-terraform-montenegro-do-kwon-korea-5e5e2af42014848d0fd5b51ea96720f2" rel="noopener noreferrer nofollow">while trying to depart for Dubai using fake Costa Rican passports</a>.&#34; There are also reports he was carrying a range of other questionable travel documents.Say what you will of SBF&#39;s unconventional bail arrangements but Do Kwon is not getting out of prison before trial.

Lessons from the Recent US Government Actions Against Coinbase, Do Kwon & Justin Sun

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