Forbes: SEC’s cryptocurrency enforcement action will not stop at Binance and Coinbase

Original Title: SEC’s Crypto Campaign Unlikely To Stop At Binance And Coinbase

Original Author: Steven Ehrlich

Original Source: forbes

Translation: Kate, Marsbit

The U.S. Securities and Exchange Commission’s (SEC) recent lawsuits against cryptocurrency exchanges appear to be an attack on the digital asset market structure, and if the agency prevails against industry leaders Binance and Coinbase, smaller firms may be targeted. “I wouldn’t be surprised by more action,” said Kristin Smith, executive director of the Blockchain Association. “At the same time, I think the enforcement action against Coinbase is the message [SEC Chairman Gary Gensler] wants to send.” If the SEC believes that most cryptocurrencies are securities and therefore fall under its jurisdiction, exchanges will not be the only ones targeted unless new laws favorable to the industry are enacted by Congress.

Jenner and Block partner Kayvan Sadeghi concurred and made it clear that even if the SEC is currently content with prosecuting just these two cases, other U.S. cryptocurrency exchanges are still in danger. “The way they’ve defended against these charges makes it clear that almost any entity with a similar business model could face the same charges,” Sadgehi said. “But it’s hard to tell if they’re trying to go after everyone everywhere.”

The pattern under discussion is securities brokerage and trading. The problem is that almost no one can agree on whether digital assets worth billions of dollars, such as ether, bitcoin, bitcoin cash, and hundreds of smaller cryptocurrencies, are actually securities. Through its enforcement actions and Gensler’s public comments, the SEC has made it clear that it considers almost all crypto assets to be securities except bitcoin. Under this logic, if a U.S. crypto exchange lists even one token, it could be in violation of the agency’s rules.

This is a scary danger for other exchanges and digital asset issuers. The SEC sued San Francisco-based Ripple in December 2020, accusing the payment company of conducting an unregistered securities offering when it sold $1.3 billion worth of the cryptocurrency XRP to investors. This was the first enforcement action against a major blockchain company, and XRP was delisted from many exchanges, including Coinbase, due to the legal danger. It is worth noting that many of the tokens listed in the two lawsuits this week, such as sol, ada, and matic, are among the industry’s largest tokens, traded not only in the U.S. but on nearly all major exchanges worldwide.

So what’s a crypto company to do? Many aren’t ready to say yet. Forbes contacted Kraken, Gemini, Robinhood, BlockFi, and Bitstamp, all of which participate in brokering and trading digital assets. They either did not respond or declined to discuss the matter openly.

An executive at a leading cryptocurrency exchange, speaking on condition of anonymity to Forbes, said there’s no easy way for their firm to register with the SEC. While traditional securities markets often limit their activities to facilitating the exchange of assets, cryptocurrency exchanges engage in brokerage, clearing, and settlement.

One potential solution might be to register the exchanges as alternative trading systems (ATS), which operate in a similar fashion to securities exchanges. In fact, a recent bill has been introduced in Congress to help provide guidance in offering these guidelines, with specific reference to the ATS model, but the legislation was drafted by a Republican-controlled House of Representatives and Democrats may be reticent.

There are a handful of ATSs that operate in crypto, but they’re specifically focused on tokenized securities rather than native tokens of blockchains, and they’re prohibited from trading any non-security assets. “ATSs are not the panacea for this problem,” said Mike Cagney, CEO of ATS operator Figure Technologies.

To be sure, token projects could try registering with the SEC as securities, but that would be a curse for the decentralized spirit of cryptocurrency.

Circle and Coinbase jointly issued a stablecoin worth $29 billion, and a spokesperson for the company said they hope new regulatory guidelines will provide a way for the industry to operate. “These are actions that have been long awaited by people, and Congress is taking stablecoins and digital asset market regulation very seriously. In fact, three federal government agencies have now made it clear that they want to see legislation,” the spokesperson said.

Even if the SEC isn’t currently taking significant action against other major exchanges, that doesn’t mean it won’t be looking for new targets in the future. Two areas of the crypto space that haven’t seen significant enforcement action yet that could be on the agency’s radar are liquidity mining and decentralized finance (DeFi) platforms.

Liquidity mining is a novel financial engineering that allows users to maintain liquidity while earning passive income by staking tokens as collateral on blockchains like Ethereum. It’s now a $17.19 billion industry, with Lido the largest platform, controlling $13.36 billion in assets. According to Gensler, at least based on his interpretation of securities law, proof-of-stake tokens can be the equivalent of investment contracts. In February, the SEC fined Kraken $30 million, which the exchange agreed to pay without admitting wrongdoing, over its staking program.

Gensler has repeatedly stated that simply calling a DeFi project “decentralized” does not guarantee that it is not subject to securities laws. “My feeling is that DeFi will be targeted,” Sadeghi said. He said that the specific language in Coinbase’s complaint could cause the government to classify some user-controlled crypto wallets as securities brokers because they are involved in transaction routing.

SEC’s increasingly aggressive activity may encourage Congress to establish clearer rules for digital assets to limit the agency’s attacks on the crypto industry. “In this recent round of cases, the SEC’s language has clearly been ratcheted up,” said Daniel Stabile, a partner at Winston and Strawn law firm. “The key is whether we get a ruling on one of these cases soon and the order of action by Congress, which will have a fundamental impact on the SEC’s regulatory power in this area.”

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