Uncle Sam Has Entered the Chat
“We'll try to cooperate fully with the IRS, because, as citizens, we feel a strong patriotic duty not to go to jail.” – Dave Barry
On May 10, Fox Business reporter Eleanor Terrett took to Twitter to publish a memo that had circulated among Democratic members of the US House Committee on Financial Services ahead of a hearing on the regulation of the crypto industry. The note was akin to any run-of-the-mill briefing document produced before a session of this complexity. Forbes – which used to be worth reading – then ran a story with the breathless headline “Leak Reveals Secret Democratic Plan For A Game-Changing U.S. Crypto Crackdown That Could Hit The Price Of Bitcoin And Ethereum” (emphasis added throughout):
“Now, a leaked memo circulated to Democratic House financial services committee members has revealed the ‘key messages’ lawmakers were told to stick to that could see almost all cryptocurrencies categorized as securities.
The document, passed to committee members by the Democratic party ahead of Wednesday’s joint House hearing on crypto policy, was leaked by Fox Business reporter Eleanor Terrett on Twitter. ‘The problem isn’t ambiguity—it’s mass non-compliance with existing laws,’ the memo reads. ‘We can't invent new accommodating regulatory structures simply because crypto companies refuse to follow clear rules of the road.’”
Leaked? Secret? If the ongoing multi-agency crypto crackdown plan was meant to be concealed, Gary Gensler has proven himself most incapable of discretion. The chair of the Securities and Exchange Commission (SEC) has been loudly making these exact points – almost word-for-word – to anybody who will listen for many months. The document itself reads as though members of his staff wrote it (and they probably did). Here is Gensler in the aftermath of filing charges against the crypto trading platform Bittrex:
As fiat flees the crypto universe leaving fraud exposed amongst several former market leaders, numerous high-profile names have filed for bankruptcy protection, setting the stage for a series of legal precedents to be decided. The collapse of Genesis Global Capital, Core Scientific, BlockFi, Celsius, Voyager Digital, Three Arrows Capital, and FTX has created a plethora of novelty for the courts to muddle through. With lawyers, consultants, and forensic experts picking over the remains of enterprises that were once valued in the tens of billions of dollars, the complex questions of fraudulent conveyance, customer restitution, and creditor jockeying make for a fascinating study and put practical pressure on regulatory bodies of all stripes.
Given the scale of the staggering fraud involved in the FTX bankruptcy, the case has deservedly received the lion’s share of press coverage. New management, working diligently to identify, trace, and recover as much value as possible for creditors, was recently served a devastating blow from a fresh government entrant to the case: the US Internal Revenue Service (IRS). Here’s how CoinDesk described the developments:
“The United States Internal Revenue Service (IRS) has filed claims worth nearly $44 billion against the estate of bankrupt crypto exchange FTX and its affiliated entities.
According to bankruptcy filings dated April 27 and 28, the IRS put forth 45 claims against FTX companies, which include West Realm Shires (the legal entity of FTX.US), Ledger Holdings (the parent company of LedgerX and LedgerPrime) and Blockfolio, among others.
The largest of the claims includes a $20.4 billion and a $7.9 billion claim against Alameda Research LLC and two claims totaling $9.5 billion against Alameda Research Holdings Inc.”
The value of these claims swamps what management believes it can ultimately recover from the FTX estate, jeopardizing the prospects for all others. The IRS is just getting started and more pain may be coming by way of the agency’s formidable arsenal of legal tools. What does the entry of the IRS into the crypto crackdown mean for the sector and for US-based investors who participate in crypto trading? Let’s consider what Uncle Sam might be up to.