First Mover Asia: Extreme fear hits crypto as FTX hack makes bad situation worse. What comes next?

ALSO: Sam Reynolds takes a fresh look at the U.S. Securities and Exchange Commission's case against Ripple, where a 2018 SEC official’s speech notes may prove crucial.

Good morning. Here’s what’s happening:

Prices: Last week's calamitous collapse of the FTX exchange sent crypto markets for their worst seven-day stretch since the mid-June aftermath of the Terra blockchain's meltdown. A giant hack over the weekend just made things worse. Analysts in digital-asset markets are processing it all and forecasting what comes next.

Insights: SEC's unwillingness to disclose William Hinman's speech, arguably one of the most important speeches in crypto's history, highlights the agency's efforts to shape its case against Ripple.

Prices

It goes without saying that last week's collapse of the FTX exchange represents one of the crypto industry's worst-ever episodes, clearly reflected in digital-asset markets: The price of bellwether bitcoin (BTC) tumbled 22% in the seven days through Sunday, its worst weekly performance since mid-June, when traders were grappling with the aftermath of the Terra blockchain's collapse. (Here's a timeline of key FTX developments, showing how the CoinDesk Market Index (CMI) of 162 digital assets traded through it all.)

Things got incrementally worse over the weekend when FTX and its U.S. subsidiary, FTX US, became victims of an attack that drained hundreds of millions of dollars in crypto out of the exchanges' wallets. The crypto exchanges Binance and Huobi scrambled to block deposits of FTT, FTX's native tokens, after about $400 million of the tokens were unexpectedly released out of schedule, with no official explanation. The stablecoin issuer Tether blocked addresses tied to the FTX account drainer's wallets.

Crypto analysts are assessing what comes next for ailing digital-asset markets and policy ramifications for the reputation-wounded blockchain industry. Researchers at Coinbase Institutional say bitcoin, currently around $16,236, might be looking at a further price drop, possibly as low as $13,500.

One industry reform seems to be gaining momentum: Centralized crypto exchanges are being pushed to provide proof of reserves. It may take a lot more than that, and perhaps months, before the industry starts to regain public confidence. The widely-monitored Crypto Fear & Greed Index is signaling "extreme fear."

"Even though BTC has settled around $16,000 for now, the extent of the damage to other companies, funds, exchanges is as yet unknown, and may come to the fore in the weeks to come," said Joe DiPasquale, CEO of the crypto hedge fund BitBull Capital. "We remain cautious until the current situation is satisfactorily resolved and sentiment appears to start moving toward relative normalcy."

Insights

By Sam Reynolds

The SEC is keeping emails and notes that led to one of the most important speeches in crypto’s history secret from CoinDesk.

In 2018, William Hinman, the then-Director of Corporation Finance at the SEC Commission, gave a speech at the Yahoo Markets Summit that proved to be a watershed moment for crypto: Ether is not a security.

Ether, Hinman said at the time, had become “sufficiently decentralized” and thus moved past its nebulous status of security-not-a-security to commodity.

“Based on my understanding of the present state of ether, the Ethereum network, and its decentralized structure, current offers and sales of ether are not securities transactions,” a copy of the speech reads. “Purchasers would no longer reasonably expect a person or group to carry out essential managerial or entrepreneurial efforts.”

Ripple has taken great interest in this as they were sued in December 2020 by the SEC on the basis that they were offering unregistered securities via an initial coin offering. Ripple filed suit against the SEC requesting drafts of the speech along with internal notes and received a favorable ruling in January 2022

In late September, Ripple received a huge win in its case when a U.S. judge told the SEC to release emails and other correspondence. “I can say that it was well worth the fight to get them,” Ripple’s General Counsel Stu Alderoty tweeted.

But these remain confidential. CoinDesk attempted a Freedom of Information Act request to obtain these documents, but the 71 documents that were sent were heavily redacted.

The SEC said that it was unable to release the unredacted documents as they were “prepared in anticipation of litigation, forms an integral part of the pre-decisional process, and/or contains advice given to the Commission or senior staff by the Commission’s attorneys.”

It also noted that the release of the documents would constitute an “unwarranted invasion of personal privacy.”

What is visible is a massive email thread that took place over the course of two weeks where drafts of the speech were shopped around the Commission.

A whole cast of characters from the SEC weighed in, including Jay Clayton, the then SEC chair, Lucas Moskowitz, its former chief of staff, David Fredrickson, a senior legal advisor, Jennifer McHugh, an acting associate director of the Disclosure Review, as well as Valerie Szczepanik, head of its strategic Hub for Innovation and Financial Technology.

We don’t know what was said in this email chain, but there certainly was a lot of input from the Commission. Fredrickson, in his role as legal advisor, made some edits. Szczepanik also weighed in along with McHugh.

The input from senior Commission staff might undermine the argument that Hinman’s speech was his own opinion and “not necessarily that of the Commission.” The SEC wants the market to think that this speech wasn’t guidance, but it sure looks like the SEC provided a lot of guidance in its drafting.

In an earlier interview with CoinDesk during Singapore FinTech Week, Alderoty, Ripple’s counsel, called the SEC’s current approach to crypto a failure that runs the risk of driving the digital assets industry offshore as there’s no “clear regulatory framework”. In Fortune, he wrote that Hinman’s talk was ‘the speech that muddied the crypto waters’.

“It has not provided clarity, and it's pushing innovation offshore to other economic centers like Singapore. And it's hurting the very retail consumer in the U.S. that the SEC is supposed to protect,” he said. “If the US gets this wrong, they're going to lose their position as a leader in this new financial economy.”

The case between Ripple and the SEC will likely be drawing to a close early next year (there were court dates planned for November, but extensions were granted).

Alderoty seems happy with the version of documents the SEC provided him. All this should make for an interesting next court appearance.

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