Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Tuesday, September 19th, and today we are talking about Binance and their SEC court decision yesterday. Is it significant? And is it just kicking the can down the road? We will go through all of that. Before we do, however, if you are enjoying The Breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit .ly slash breakdown pod. Well, friends, it is a day that ends in Y, so there is, of course, another Binance story. Binance had a fairly big day in court on Monday in their legal battle with the SEC. Leading into the hearing, the allegations and speculation had started to reach a fever pitch. The SEC had begun to hone in on the theory that Binance U .S. did not and never had exclusive control over customer assets. That if true would be a big deal as Binance had always maintained that U .S. customer assets were strictly segregated from the international exchange. Indeed, they used this argument to defend an SEC injunction shortly after the legal proceedings commenced in June. If granted, the injunction would have frozen assets at Binance U .S., which would have functionally been a death sentence for the domestic exchange. In deciding that injunction, the court ordered the parties to come back with an agreement that they could both live with rather than making a decision on their own. As part of those consent orders, Binance agreed that they would ensure that only local U .S. staff would have access to customer assets. However, as the SEC dug further into their investigation, they claimed that Binance U .S. which they viewed as intimately linked to Binance International. Cefu was launched under the name Binance Custody in December 2021. It was renamed in February of this year, around the same time that rumors of an in -depth government investigation into Binance first emerged. On Friday, Cefu asserted in a press release that they were entirely separate from Binance International and that they don't even service BAM Trading, which is the company that operates Binance U .S. They wrote, We strongly reject this claim. As a custody technology services provider under Cefu Holdings, we are committed to servicing institutional clients with digital asset custody solutions in select jurisdictions, excluding the United States, among others. Furthermore, Cefu's operations and services are distinctly separate from BAM and Binance Holdings Limited." A Cefu spokesperson added that, Unfortunately, earlier in the week, Binance U .S. had contradicted parts of that claim in a legal filing. Rather than denying the use of Cefu in their operations, Binance U .S. acknowledged that the service was developed by Binance International and licensed to the U .S. entity. And while the specific origin of the Binance U .S. custody system might seem like a minor detail, this is the main focus of the lawsuit at the moment. The SEC is claiming that Binance International had de facto control over customer funds at the U .S. exchange. If that's the case, then Binance could be viewed as deliberately misleading the court surrounding this issue. It would also advance the SEC's argument that Binance U .S. was nothing more than a front to allow U .S. customers to access the international exchange and provide a veneer of domestic regulatory compliance. So that's a bit of the background. Now on Monday morning, the SEC filed additional material to support their order, which asked the court to compel Binance to cooperate with the discovery process. They said, quote, Indeed, in earlier filings, the regulator had raised issues surrounding the lack of disclosure. They noted that Binance had only produced 220 documents, many of them characterized as quote, unintelligible screenshots and documents without dates or signatures. Further, according to the SEC, Binance U .S. were resisting the deposition of a number of key executives. In a court filing in August, Binance claimed that the deposition of CEO Brian Schroeder would be, quote, You'll remember that Schroeder was confirmed to have left the company in early September, although his lack of social media presence has led some to speculate that his departure was closer to the beginning of the year. The SEC appears to have been informed of Schroeder's departure only recently and clearly haven't recruited him yet as a cooperating witness. They said that this strange turn of events and Binance's continued resistance to producing Schroeder, quote, Now, the SEC was primarily concerned that Binance U .S. was continuing to use SEFU for its custody, which could be used to shift customer assets offshore. They said that Binance U .S. had failed to convince the regulator that they had control over customer assets, adding that these claims were, quote, Binance U .S. had provided, quote, They said that, quote, BAM insists that this court, like the SEC, should accept packaged counsel narratives, carefully drafted declarations, and small curated sets of documents regarding control of BAM's customer assets, and that any lingering concerns are much ado about nothing. To top it all off, the SEC warned that Binance CEO CZ is, quote, The SEC claimed that they have demonstrated that, quote, Binance has a long history of controlling BAM to serve Binance's own unlawful purpose. Ultimately, the regulator asked the court for an order, quote, Now, in their opposing court filing placed on the record on Monday morning, Binance U .S. reiterated their claim that SEC demands were unreasonable. They called the documents requested overbroad and too much of an inconvenience. Binance U .S. further alleged that many of the documents requested are either not in the exchange's possession or fall outside the scope of the lawsuit. At 3 p .m., the parties entered the courtroom for what would be a tense hearing. Binance U .S. called the demand for documents so broad they would be impossible to produce. A lawyer representing the exchange said that, quote, The judge indicated that Binance U .S. really would need to provide a bit more documentation of their custody arrangements. They said, adding that they weren't, quote, The SEC lawyer, meanwhile, explained that the problem at the moment was that, quote, They argued that the SEC needed much more information about the wallet set up at Binance U .S. than they currently have. At one stage, the attorney for Binance exclaimed, They said that the exchange had responded to every targeted request from the regulator. The lawyer added that, quote, So what came out of all of this? Well, ultimately, the judge declined to make any orders to compel discovery from Binance, but it was made clear that the exchange would need to increase its cooperation, let's say. The judge said that they were not, adding that, quote, I'm not going to order from the bench right now that they produce or not produce things. Let's continue to try to work this out. I just want to keep things moving. The judge also noted that, quote, As investor Adam Cochran summed it up, the judge did deny the inspection but also said they needed Binance U .S. to comply and produce more documentation as the judge was not convinced of the asset backing. This is saying the inspection is overkill for now and giving Binance the chance to comply. Now, ultimately, these issues around Sifu are largely still about litigating whether the assets of Binance U .S. should be frozen to prevent customer funds from being sent offshore. However, given that volumes on the exchange have collapsed by more than 99 percent over the past six months, it seems likely that users have largely taken that issue off the table already. The matter is scheduled to return to court on October 12th for a follow -up hearing. Now, outside of the hearing, the court docket continues to bloat with additional evidence gleaned by the SEC. Much of this evidence was originally filed under seal or in a heavily redacted form, but the regulator is currently in the process of unsealing documents. Earlier this month, the SEC obtained the cooperation of the former auditor for Binance U .S., which produced in excess of 6 ,500 pages on the accounting at the exchange. The document was unredacted on Monday, revealing the auditor's conclusion that it was, quote, very difficult to ensure the company was fully collateralized at specific points in time. One of the SEC's requests for further information filed in June related to a 250 million dollar intercompany loan given to Binance U .S. by the international exchange in December of last year. The convertible note was funded using BUSD, 183 million of which was sent to Paxos to convert into dollars. The SEC wanted some additional details about the reason for this transaction. The topic was initially flagged as confidential by Binance, but that designation was apparently successfully rebutted by the SEC. Now, there was a lot of chatter on this on Twitter. With many people taking it as evidence of some smoking gun, Binance had been less than honest about their dealings with Binance U .S. Perhaps the most intriguing tidbit, however, filed recently was a declaration given by J. Emmett Murphy of the SEC's trial division. The document, again filed on Monday, introduced into evidence three additional depositions. All three were filed under seal, but were used to support the need for further examination of the SEFU system. The declaration identified one witness as Eric Kellogg, BAM's chief information security officer, but the other two identities were redacted. All three depositions occurred over the last month, with the latest taking place last Wednesday. So here's the way that Adam Cochrane summed this all up, which I think is a pretty good TLDR. He tweets, SEC seeks court order for inspection of Binance U .S., now expressly calling out that SEFU is indeed a Binance -related entity and that Binance U .S. has been misleading the court. The SEC calls out that this violates the consent decree that required new wallets expressly away from Binance International Control and Access, but interestingly specifically notes this is important as Binance has controlled BAM for its quote, own unlawful purposes. That's a claim we've not seen the SEC lobby here before, at least not outside of anything sealed or redacted. We also learned for the first time that the SEC sought the testimony of Brian Schroeder, U .S. CEO, and Jasmine Lee, U .S. CFO, but have been denied and fought on that and only just got told that Schroeder is no longer CEO, despite Schroeder being missing for eight plus months. They had argued that Schroeder's testimony would be too disruptive to business and now got told he isn't on the job, which is wild, as I think we all assumed he pulled a Catherine Coley Brian Brooks and gave testimony. Seems he's just disappeared and gone silent? Either way, the SEC here is suggesting, one, there is evidence of crimes, two, there is indeed evidence that SEFU is Binance International, three, SEFU is not simply a wallet provider, and four, BAM executives themselves lack insight on Binance U .S. assets and tooling. Now, for completeness, Adam Cochran also tweeted about the deposition from the auditor that said that it was impossible to tell whether Binance U .S. had been fully collateralized at specific points in time. He said, if your own external auditor can't say you are fully collateralized when you are supposed to be a 100 % reserves exchange and have your own proof of reserves that claim you're over collateralized, that is a problem. Binance uses the SEFU wallet custody system, previously Binance Custody, for both Binance International and Binance U .S., as noted in their filings. If this system is not capable of managing the small Binance U .S. numbers, how could it keep track of International? And if Binance U .S., its more compliant exchange, never commingled or misused client funds and was isolated from International as they claim, then it would be literally impossible to have a gap. The only way this is possible is the misuse of customer funds resulting in losses. I believe at some point in their scaling, they had material losses when misusing customer funds and exposing themselves to leverage via BNB. They've continued to misuse customer funds to try and cover this hole, but a declining market has made that an ongoing shell game. Whether you think that is a fair assessment or not, there should at this point be absolutely no doubt that the correct risk model is to move your assets off of Binance. Now, for the sake of a counterpoint, Bruce Fenton tweeted this morning, Binance is perhaps the most scrutinized and attacked company in modern history. The United States has investigated them and thrown everything they can at them. Yet, despite all this, we don't have a single accusation, let alone evidence, that Binance has lost customer funds. Now, trying to wrap this all up, a lot of the commentary around this is trying to figure out if the SEC won or lost this court trip. Will Clemente from Reflexivity Research tweeted, courts have been handing the SEC L after L lately, but others aren't so sure. CZ certainly didn't think so, retweeting someone who wrote, seems like they can't find anything but they want to continue making headlines. Maybe the most middle of the road interpretation came from the headline from Bloomberg, which read, SEC fails to win immediate inspection of Binance US software, and I think that that fails to win is probably a better representation at this point than actually getting the loss. But my friends, as you can tell, we are well in the minutia of this, but the details matter. There certainly is a feeling of crescendo to this story. And either way, it's hard for me to imagine that the industry isn't better on the other side of it. Better because Binance has vindicated, or better, unfortunately, because the last giant has fallen, and we can finally move on, largely rid of what came before. In either case, I will be sure to keep you updated. So until next time, be safe and take care of each other. Peace.