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The iron fist of the US Securities and Exchange Commission (SEC) has struck Binance and Coinbase, and the lawsuit against Coinbase, which has tens of thousands of US users, may stimulate Congress to take action on cryptocurrency regulation. The more serious allegations against Binance could bring down one of the most profitable enterprises of the 21st century. Can the SEC win? Will Binance be shut down in the US? What will Congress do? With the SEC taking action against the largest player in the crypto industry, Coindesk interviewed some legal institutions and senior crypto insiders to better understand the future implications of the case for the industry.
Is there any reason for companies to be optimistic about these lawsuits?
- One Month Anniversary of Sui Mainnet Launch: Analysis of On-Chain Token Holders
- Can Binance’s counterattack against SEC’s accusations hold up?
- Can Binance stand its ground against SEC’s accusations?
Lawyer Brian Frye: Maybe, I’m not optimistic about the SEC’s accusations against Binance, it’s brutal. Binance basically admits to everything the SEC has charged. This is a disaster.
I think Coinbase is in a much better position. It has been trying to comply with SEC regulations for some time, and the SEC has even refused to participate in Coinbase’s good-faith efforts to comply, which doesn’t look good and I think at least some courts might push back. Courts expect institutions to act predictably. Coinbase has been asking the SEC what it wants and the other side has been refusing to respond. This might make Coinbase look like the good guy and the SEC look like the bad guy.
In addition, I don’t think the SEC has still provided a coherent explanation of what it wants to regulate, what it thinks it has the authority to regulate, why it wants to regulate, and how it wants to regulate. If the US Securities and Exchange Commission wants regulatory power, it is a security.
Another issue is that institutions must be credible, and the SEC has credibility issues. It is regulating through enforcement and will bring a lot of pain to crypto companies in the short term and must consider longer-term issues.
The SEC has recently been severely criticized by the courts for overstepping its bounds in the ALJ [Administrative Law Judge] area. If the courts are able to take a serious look at its method of dealing with crypto assets, I wouldn’t be surprised, especially for those companies that are trying to comply but are being refused by the agency.
Lawyer Mike Selig: Lawsuits are not entirely bad for the crypto industry. In the context of these lawsuits, foreign jurisdiction are adopting crypto laws and regulations, and US lawmakers are debating crypto market structure legislation in Congress. Whenever the SEC sues another crypto business, the political pressure for wise crypto legislation in the US increases – especially if the company has been publicly stating it has been trying to comply with applicable laws and regulations.
These lawsuits encourage companies seeking to comply with clear applicable rules to leave the US, as foreign jurisdictions welcome them with open arms and have developed a new set of laws and regulations. However, there is reason to be optimistic about the lawsuits brought by the SEC, as they can prompt Congress to recognize that the SEC’s enforcement approach is not working and needs comprehensive legislation – otherwise, the industry will flee to more lenient jurisdictions.
Blockchain Association CEO Kristin Smith: This week’s action by the SEC clarifies the path forward – and it’s urgent: Congress must act. Last week, Chairman Blockingtrick McHenry of the House Financial Services Committee and Chairman Glenn Thompson of the House Agriculture Committee introduced a draft discussion of digital asset market structure, a step towards effective regulation. As responsible regulation of crypto is being implemented worldwide, it is essential that the US remains competitive.
Will Binance or Coinbase change their operations in the short term?
Kristin Smith: The SEC does not make law – it only brings charges. Enforcement action is just the view of a regulatory agency – the courts will decide whether its interpretation of the law is correct. Everything will continue as normal unless the SEC wins.
Does the SEC’s lawsuit against Binance and Coinbase mean the agency will redefine crypto?
Lawyer Brian Frye: Yes and no. I think these lawsuits illustrate what I’ve been saying for a long time, but people just don’t want to hear it. “Is it a security?” is not an ontological question. If the SEC wants to regulate it, it’s a security. So the real question is what does the SEC want to regulate, why does it want to regulate those things, how can companies comply with the SEC’s regulatory goals, and whether any of it makes sense.
Lawyer Mike Selig: “All this has happened before, and it will all happen again,” to quote Battlestar Galactica. For years, the U.S. Securities and Exchange Commission (SEC) has been gradually building a legal theory around appropriate registration categories for cryptocurrency securities and various cryptocurrency intermediaries. Lawsuits against Coinbase and Binance are the culmination of all prior events. Neither of these cases provided a great deal of new information about how the SEC views cryptocurrency, but if you want to know the agency’s stance on cryptocurrency, these complaints are worth a read.
That said, there are some novel aspects to these complaints. In the case of Coinbase, the SEC for the first time asserts that offering non-custodial digital wallet software is a broker-dealer activity because the wallet can be used to buy and sell so-called securities through third-party decentralized applications, for which the software developer charges a fee.
In the Binance case, the SEC asserts that BUSD is a security under a new theory — that Binance uses profits from the sale of BUSD to provide various profit-sharing schemes to BUSD holders — issued by a New York limited purpose trust company regulated by the New York State Department of Financial Services. In both complaints, the SEC argues that many cryptocurrencies are securities, which it had not previously treated as such in lawsuits against issuers or other secondary participants.
In the long run: What would happen to crypto if the SEC wins and Coinbase/Binance loses at the Supreme Court?
Frye: Good question, it depends on what the SEC wants to achieve. If it wants to destroy cryptocurrency, it might do that if Congress allows it. Or at least it could roll back cryptocurrency regulation to the late 2000s stage. But I don’t think that’s going to happen. The SEC is conservative, doesn’t like new things, but it also recognizes that its duty is to regulate the market. I think it will eventually realize that it has to take its regulatory role more seriously.
But equally, I’m disappointed in the SEC’s response to crypto regulation. I think regulation can be good and effective, but the SEC hasn’t even tried to issue coherent regulations for cryptocurrency assets, it’s just repeating talking points, which is embarrassing, regulators should introspect, and the public deserves better. Regulators should actually do some real work, understand the markets they intend to regulate fully, and explain what they’re regulating. The SEC has completely failed in this regard, and that’s unacceptable.
Selig: The future of US cryptocurrency is likely to be determined by Congress rather than the courts. Even if the SEC wins its lawsuits against Coinbase, Binance, Ripple, and other companies (even all the way up to the Supreme Court), we may still see legislation establishing a reasonable regulatory market structure for crypto assets pass through Congress. Coinbase, Binance, and other participants in the crypto ecosystem will ultimately have a compliance path. Every major foreign jurisdiction is moving in this direction, and the US is unlikely to remain the sole holdout.
If you were a lead counsel for any token that has been or is currently designated as a security in any of these lawsuits, how would you advise?
Frye: I would advise them to rescind the asset and expect to pay a fine, which could be a significant number.
Selig: Development companies and foundations associated with any crypto assets mentioned in the lawsuits may be inclined to intervene to defend the non-securities attributes of crypto assets. These entities should carefully consider the potential risks and benefits of doing so with legal counsel. Developers and users on these networks should also consult legal counsel with respect to their business activities, but the SEC’s conclusion that certain crypto assets are securities is arbitrary and has not been supported by a judicial ruling on the definition of a security.
Will these cases change the way Congress deals with cryptocurrency regulation?
Frye: I think it’s definitely a watershed moment. Ultimately, Congress decides what agencies can do. It can pass new legislation, at least in theory. It can encourage the Biden administration to appoint new executive officers, it can push back against the SEC’s decision-making.
Selig: SEC jurisdictional overreach may come back to bite it. Members of Congress have been keen on expanding the Commodity Futures Trading Commission (CFTC) rather than the SEC’s jurisdiction over crypto assets, even within the SEC’s contractual power over any crypto asset related to a decentralized or functional network. The SEC has not issued sound rules applicable to the crypto asset industry, reducing the need for comprehensive legislative solutions involving the CFTC, and has regulated through enforcement, inflaming the industry. Therefore, industry participants may favor other market regulators.
Could the current situation potentially lead to most (if not all) cryptocurrencies being banned or subject to restrictions that make them ineligible for registration and other requirements?
Frye: Yes, but I am skeptical about that. I think the SEC is more likely to increase the difficulty of introducing new cryptocurrencies.
Selig: It is currently unlikely that there will be effective laws or regulations within the United States that will prohibit cryptocurrency assets. Legislators and regulators worldwide recognize the huge potential of crypto technology and are developing reasonable legal frameworks for the asset class. The US is late to the party, but FOMO will kick in. Every new investment product, from renewable energy credits to credit default swaps, goes through a period of regulatory haze before becoming an asset class subject to proper oversight and validation. Crypto is no exception.
What was omitted in the public discussion of crypto law?
Antitrust activist Matt Stoller: While courts or Congress could act arbitrarily, the hype machine for cryptocurrency has moved on to artificial intelligence, which—while it has a lot of hype associated with it—is a useful technology. So, the only question for crypto advocates is whether they can deliver use cases beyond money laundering and speculation?
What message did the lawsuits against other cryptocurrency exchanges send? Would you be worried if you were a US cryptocurrency exchange?
Frye: Yes. The SEC is clear that it is taking action, but this is not the goal the SEC wants to achieve, and that is a problem.
Selig: The SEC’s enforcement division is clear: “We generally agree with SEC Chairman Gensler that most crypto assets are securities.” The agency now asserts that most of the top ten crypto assets by market capitalization are securities, especially excluding Bitcoin and Ethereum, and this fact proves their point.
However, the law is not settled, and other lawsuits, including the Coinbase and Binance cases, will be brought. I would be surprised if we see more cases related to crypto asset trading brought by the SEC in the short term. Cryptocurrency exchanges must continue to assess whether each cryptocurrency is a security based on the unique facts and circumstances associated with each cryptocurrency.
There are several allegations against Binance that, if true, are almost fatal, including allegations of false trading and practices that put customers at risk (some reminiscent of FTX). Is there cause for concern about the future of centralized exchanges?
Frye: I don’t know, but maybe?
Is there a worse SEC chairman than Gary Gensler? (Implication: is there anything more destructive to the industry than these two major lawsuits?)
Frye: Everyone in the crypto space is complaining about Gary Gensler. I also criticize his regulatory approach. But what if the head of the SEC were Lina Khan, head of the Federal Trade Commission (FTC)? Or, more realistically, what if Lina Khan decided that the FTC should regulate cryptocurrency products? I wish you luck.
Smith: No, unfortunately, it is clear that Chairman Gensler has openly ignored his agency’s mission to protect investors. Just this week, the SEC indirectly classified crypto assets worth around $120 billion as securities. Is trying to eliminate these tokens protecting investors?
Could the lawsuits potentially lead to Binance and/or Coinbase shutting down in the US?
Frye: Yes. Based on the complaints, I think this is a very real possibility for Binance, but less likely for Coinbase, which has done its best to comply with the SEC’s rules and expectations.
What do you think of Gary Gensler’s statement that the world doesn’t need digital currencies because the US dollar, euro, and yen are all digital currencies? Why is Gensler making this statement instead of focusing on his actual responsibilities?
Smith: Gensler now seems to have shown all his cards: he believes the United States should not have digital currencies. He is clearly familiar with the technology and has been willing to explore its potential in the past. He also understands businesses like Coinbase, which are public companies, and the products and services approved by the SEC, as well as their financial disclosure obligations. Therefore, without more information, we can only speculate on Gensler’s motives.
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