The waters have been very hot in the crypto industry this week. The U.S. Securities and Exchange Commission (SEC) has filed two separate lawsuits against two of the largest crypto exchanges in the world: Binance and Coinbase.
“This is about both investors and issuers in the crypto space, to bring them into compliance,” SEC Chair Gary Gensler said in a live interview with CNBC on Tuesday morning. “We brought a number of actions. We stand ready to continue to work with the industry.”
The industry is asking why these suits took so long to come to fruition, why some crypto assets are being labeled as securities and not others, and whether the SEC’s actions will impact domestic and global fintech innovation — all of which Gensler tried to address.
Gensler didn’t hold back his feelings on the industry’s significance: “We don’t need more digital currency. We already have digital currency. It’s called the U.S. dollar, it’s called the euro, it’s called the yen. They’re all digital right now […] so what’s the real underlying value of these tokens?”
The SEC chair also said the agency has had conversations with “dozens of crypto incumbents” and currently believes that the industry’s business model is “built on noncompliance with the U.S. securities laws” and many are “commingling various functions that in traditional finance we don’t allow.”
Whether the lawsuits are fair, many people in the industry believe that they do highlight the need for clearer regulations in the sector.
“The runway for coming in and registering was coming to an end, and it appears to have ended,” said Joshua Ashley Klayman, head of blockchain and digital assets at Linklaters LLP. The SEC actions appear to be signaling a move to “meaningfully and forcefully change existing crypto market structure,” she added.
All in all, the lawsuits are a “pivotal event” for the crypto ecosystem and exchanges, according to Jack Vinijtrongjit, co-founder and CEO of web3 infrastructure firm AAG.
In his view, there could be eventual benefits from the SEC’s actions. “The lawsuit could initially create uncertainty and volatility in the U.S. crypto economy,” Vinijtrongjit told TechCrunch+. “There might be short-term setbacks, but in the long run, it could lead to a more robust regulatory framework, which might be beneficial for the industry’s growth.”
The timing of the charges is notable, as they came in less than 24 hours apart even though both exchanges have existed and operated globally for years. Coinbase has operated in the U.S. since 2012, while Binance’s American arm, Binance.US, launched in 2019. (The SEC’s suit covers a shorter period of time, but Coinbase’s age is a pertinent fact to keep in mind.)
The shorter time frame from launch to enforcement makes sense for Binance, but many people in the crypto industry are confused by why it took the SEC over 11 years to sue Coinbase, especially after it went public in 2021. In response to that, Gensler said, “It takes time, we do things by the book.”
Some believe the timing could be calculated, considering that the SEC is working with some crypto companies to bring them on board.
“The timing coincides, coincidentally or not, with proposed SEC rule changes that would expand both the definition of exchange and the existing custody rule into a safeguarding rule, as well as with the recent designation of Promethium Capital as a special purpose broker-dealer and an [alternative trading system],” said Klayman.
Addressing Binance, Gensler said the SEC has concerns and noted that the public should be aware of those worries when putting their assets on a platform that’s “consciously trying to evade U.S. law.”
In general, Gensler’s sentiment toward Binance seems more severe than it is toward Coinbase. “As we alleged in Binance, having a sister organization flooding the platform with transactions is called wash trading, and a lack of controls on the platform is really a web of deception and conflicts, along with a control person, Mr. Zhao, trying to evade U.S. law.”
Klayman thinks the Coinbase lawsuit appears to aggregate the types of charges from several years’ worth of narrower enforcement actions against other digital asset market players. “It provides a comprehensive map for how the SEC views the crypto landscape.”
Talking about securities
Both the Coinbase and Binance filings listed a handful of cryptocurrencies as securities, with 12 different assets noted in the Binance suit and 13 in Coinbase’s filing, though the SEC said the demarcation was “not limited to” those listed.
Both suits mentioned SOL, ADA, MATIC, FIL, SAND and AXS as crypto asset securities. The two largest cryptocurrencies by market capitalization, Bitcoin and Ethereum, were not mentioned, and it’s worth noting that Gensler has called Bitcoin a commodity in the past.
SEC claims BNB and BUSD are securities, including major tokens like SOL, ADA and MATIC
The lawsuits have been criticized widely by people in the crypto industry, who argue that the agency is overreaching by listing a number of cryptocurrencies as securities without addressing the assets individually.
It’s a complex issue. Some digital assets may have characteristics of securities, but others do not, Vinijtrongjit thinks. “The broad classification could potentially hinder the growth of the industry.”
Jay Jog, co-founder of layer-1 blockchain Sei Labs, echoed that sentiment: “The SEC’s move to list certain crypto assets as securities has introduced a layer of uncertainty within the crypto space.” Overall, the changing regulatory stances have made operating within the U.S. more challenging, he added.
But Gensler feels that if there’s real value in these crypto tokens, then compliance will build trust and the business model might change. “Many of these will fail because many entrepreneurial projects fail. I don’t believe the public or economies need more than one way to move value,” he said.
“What we’re doing at the SEC is pro-innovation, because without trust, the capital markets really don’t work,” Gensler said.
For many, the SEC — and other U.S. regulators — is stifling innovation in America and pushing talent abroad by regulating the industry through enforcement, instead of working with industry players to come to a decision together.
The situation could eventually escalate to a point where exchanges find the risk too great, opting to halt operations within the U.S. entirely, Jog said. “This would be a step back for [the] U.S. as a global entrepreneurship and innovation hub.”
Let’s be clear: the @SECGov complaint doesn’t mention this, but there is currently NO way for a platform like @coinbase to register as a securities exchange, broker, or clearing agent. That’s why they’ve been begging @SECGov for YEARS to give them a path to compliance.
— TuongVy Le 🗽🔭🍕🦄 (@TuongvyLe12) June 6, 2023
Future of American innovation
For Gensler, the enforcement is actually fostering innovation because it’s trying to build trust, “and the crypto markets are undermining that trust.”
But this exodus could potentially undermine the U.S. position in the evolving global crypto landscape and may result in a significant redistribution of talent and capital in the crypto industry, Jog thinks.
“The ripple effects of this lawsuit are far-reaching, injecting a considerable level of uncertainty into the U.S. crypto economy,” Jog added. “It’s becoming clear that these legal actions can deter innovation and investment within U.S. borders. Crypto teams, faced with this challenging regulatory climate, are already contemplating moves to jurisdictions with a more welcoming stance toward crypto.”
While the market seems to be all doom and gloom, Gensler noted that in the last two weeks, the SEC has successfully onboarded crypto companies in a regulated manner. He said a crypto entity has filed and registered as a special purpose broker dealer and has had success with tokens. “Now it’s about these crypto exchanges in the middle of the market, where frankly, the public should really be careful.”
The actions this week appear to reflect that, to the contrary, “the SEC is not afraid of a long, potentially tough fight against some of the largest and most well-capitalized digital asset market participants,” Klayman said.
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