Authors: Daniel Kuhn, Anna Baydakova, Coindesk
Translator: Wang Eryu, BlockingNews
After years of playing to the crowd in the cryptocurrency space, SEC Chair Gary Gensler is finally getting serious. And he’s going after Binance and Coinbase. During his tenure, he has repeatedly hinted that PoS tokens are securities, suggested that all cryptocurrency exchanges are illegal operations, and that all cryptocurrencies except one are “investment contracts” that satisfy the Howey test. The Howey test is a standard for determining whether a financial asset is a security.
Gensler is likely ready for the fight against the world’s largest cryptocurrency exchange, Binance, and the largest publicly traded cryptocurrency company, Coinbase. Coinbase CEO Brian Armstrong said months ago that the SEC was preparing to file, and that if it did, the exchange would fight back.
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Such federal enforcement actions initiated by Gensler may ultimately go to the US Supreme Court. Coinbase, which went public just days before Gensler’s appointment was confirmed, has a large user base in the US, and a lawsuit against the exchange could prompt Congress to take action on cryptocurrency regulation. In addition, more widespread charges against Binance (if true) could deal a heavy blow to one of the most profitable companies of the 21st century.
These are the known unknowns. But this week’s SEC one-two punch also reveals new information about the agency’s stance on cryptocurrency and why it’s so aggressive.
CoinDesk spoke with legal experts and cryptocurrency industry observers to gain insight into the possible outcomes of the cases and their impact on the industry’s future. The roundtable discussion provided a diverse range of perspectives and opinions on this uncertain situation.
Do these companies have reason to be optimistic about the lawsuit?
Brian Frye, lawyer: Maybe. I’m not optimistic about the SEC’s case against Binance. The allegations are brutal. Binance basically admits to everything the SEC alleges. It’s a disaster.
I think Coinbase is in a better position. It has been struggling to comply with SEC regulations for some time, and the SEC has even refused to support Coinbase’s efforts to comply. I think this will be unfavorable to the SEC, and I think at least some courts may oppose this charge.
Courts expect institutions to act in a predictable way. Coinbase has been asking the SEC what it wants, and the SEC has always refused to respond. This may make Coinbase look more like a positive role, and the SEC more like a villain.
Furthermore, I think the SEC has not provided a coherent explanation on several issues (or even any issues), including what it wants to regulate, what it thinks it has the authority to regulate, why it wants to regulate, how it wants to regulate, and what goals it wants to achieve through regulation, etc.
The SEC has been saying for years that it doesn’t like any type of crypto assets, but it hasn’t given a reason, nor has it made it clear why it thinks they are a problem. It hasn’t even pretended to explain how it would regulate crypto assets in a way that is more in line with its regulatory authority.
“If the SEC wants to regulate it, it’s a security” – Brian Frye
This is a problem. Institutions must be trustworthy, but the SEC has credibility issues. Its swaggering will bring a lot of pain to crypto companies in the short term. But it also has to consider longer-term issues.
Recently, the SEC has been hit by the courts for overreach in administrative law judges. I think the courts will at least scrutinize the SEC’s regulatory strategy for crypto assets, especially when it comes to some companies that are striving to comply but are shut out by the agency.
Mike Selig, Lawyer: The SEC’s lawsuit is not entirely bad for the crypto industry. While these lawsuits are underway, foreign jurisdictions are developing crypto regulations, and US lawmakers are also discussing structural legislation for the crypto market in Congress. Every time the SEC sues another crypto company (especially if the company has consistently stated that it is trying to comply with applicable laws and regulations), US lawmakers will face greater pressure to enact appropriate crypto regulations.
These lawsuits will encourage some compliance-seeking companies to leave the US, where foreign jurisdictions welcome them with open arms and have developed a whole set of new regulations and regulatory norms. However, the lawsuits against two of the world’s largest cryptocurrency companies by the SEC also offer reasons for optimism, as they may prompt Congress to recognize that the SEC’s enforcement regulatory approach is not working and that comprehensive legislation is essential, otherwise the entire industry will escape to more relaxed jurisdictions.
Kristin Smith, CEO of the Blockchain Association: The SEC’s actions this week have made the path forward clear: Congress must act immediately. Last week, Chairman of the House Financial Services Committee Patrick McHenry and Chairman of the House Agriculture Committee Glenn Thompson led a discussion on digital asset market structure, which is a step towards effective regulation. As countries around the world take action to advance responsible regulation of the cryptocurrency industry, the US must remain competitive.
In the short term, will Binance or Coinbase change their operations?
Smith: The SEC doesn’t make laws, it only brings charges. Enforcement actions represent only the views of this regulatory agency, and the court will rule on whether its interpretation of the law is accurate. Unless the SEC wins, everything may remain the same.
Do the SEC’s lawsuits against Binance and Coinbase reveal any new information about how the agency views the cryptocurrency industry?
Frye: It can be said yes or no. I think these lawsuits actually confirm the view I have been advocating for a long time but has been ignored. “Is it a security” is not an ontology problem. As long as the SEC wants to regulate it, it is a security. So the real question is what the SEC wants to regulate, why it wants to regulate it, how companies can comply with the SEC’s regulatory goals, and whether these goals are logical.
Selig: Applying a line from the American drama “Battle Star Galactica”: “All of this has happened before. And all of it will happen again.” For years, the SEC has been gradually building a legal theoretical foundation for determining whether cryptographic assets are securities and whether intermediaries of various types of cryptographic assets need to register in an appropriate category. The lawsuits against Coinbase and Binance are a culmination of various events leading up to this. Neither of these two lawsuits provided much new information about how the SEC views cryptocurrencies, but if you want to know the agency’s views on cryptocurrencies, these charges are worth reading.
There are some new elements in the allegations. For example, in the case against Coinbase, the SEC for the first time claimed that providing non-custodial digital wallet software falls within the scope of broker-dealers, because the wallet can be used to buy and sell so-called securities through third-party decentralized applications, and the software developer charges fees for it.
In the case against Binance, the SEC based on a new theory claimed that BUSD (a US dollar stablecoin issued by a New York limited-purpose trust company regulated by the New York State Department of Financial Services) is a security because Binance’s use of BUSD generates interest-bearing products for BUSD holders. In both lawsuits, the SEC claims that many cryptocurrencies are securities, but previous lawsuits against issuers or other secondary participants did not consider these assets as securities.
Long term: If SEC wins and Coinbase/ Binance loses in the Supreme Court, what will the cryptocurrency industry look like?
Frye: Good question. It depends on what the SEC’s goal is. If it wants to destroy cryptocurrency, it may be able to do so with congressional approval. Or at least it can make cryptocurrency return to its pre-2010 state through regulation. But I don’t think that will happen. The SEC is a conservative force that doesn’t like new things, but it also understands that its duty is to regulate the market. I think it will eventually realize that it needs to take its regulatory responsibilities more seriously.
“The SEC has not even attempted to issue coherent and consistent regulations for cryptocurrencies.”
But I have to say, I’m disappointed with the SEC and its actions on cryptocurrency regulation. I think there can be good, effective regulation. But the SEC has not even attempted to issue coherent and consistent regulations for cryptocurrencies. It’s just speculation over and over again. It’s embarrassing, and these regulators should be ashamed of themselves. The public deserves better regulatory agencies. Regulatory agencies should really do their job, understand the market they want to regulate, and explain their regulatory decisions clearly. The SEC has completely failed in this regard, and it’s unacceptable.
Selig: The future of the US cryptocurrency industry may be determined by Congress rather than the courts. If the SEC wins its lawsuits against companies such as Coinbase, Binance, Ripple, etc. (even all the way up to the Supreme Court), we may still see legislation establishing reasonable regulatory market structures for crypto assets pass through Congress. Coinbase, Binance, and other crypto ecosystem participants will eventually find a compliant path. All major foreign jurisdictions are moving in this direction and the US is unlikely to be an outlier forever.
How would you advise the foundation for this token?
Frye: I would advise them to write down assets and be prepared to pay a fine. Maybe a huge amount.
Selig: Companies and foundations involved in the development of crypto assets mentioned in the lawsuit may be inclined to intervene and defend the non-security status of their crypto assets. These entities should carefully weigh the potential pros and cons of doing so with their legal advisers. Developers and users on these networks should also consult legal advisers regarding their activities, but the SEC’s claims that certain crypto assets are securities are just that – claims. They have not received judicial support for the security status.
Do you think these cases will change the way Congress enforces cryptocurrency regulation?
Frye: I think this is absolutely a watershed moment. Ultimately, Congress will decide what regulators can do. The Biden administration seems to be ignoring all of Gensler’s actions in crypto, which makes sense, as they have bigger things to worry about. But Congress can theoretically encourage the appointment of a new executive. It can oppose the SEC’s decision-making.
Selig: The SEC’s move to assert jurisdiction may backfire. Members of Congress have long been eager to expand the jurisdiction of the Commodity Futures Trading Commission (CFTC) rather than the SEC over crypto assets, and even want to take away any jurisdiction the SEC has over decentralized or functional network-related crypto assets. The SEC has not issued reasonable regulations applicable to the crypto asset industry to reduce the need for comprehensive legislative solutions involving the CFTC, instead choosing to regulate and fight the industry through enforcement. As a result, industry participants may prefer another market regulator.
Is it possible that the current situation could lead to legislation that would ban most, if not all, cryptocurrencies, or impose overly burdensome registration requirements?
Frye : I am skeptical. I think the SEC is more likely to raise the bar for new cryptocurrency launches.
Selig : It is unlikely that the current situation will result in laws or regulations that effectively ban crypto assets within the United States. Legislators and regulators worldwide recognize the enormous potential of the technology and are working to establish reasonable legal frameworks for this asset class. The US is late to the party, but will also FOMO in the future. Every new type of investment product, from renewable energy credits to credit default swaps, goes through a period of regulatory uncertainty before becoming a properly regulated and validated asset class. Cryptocurrencies are no exception.
Do you think any aspect of the public discussion around cryptocurrency law has been overlooked?
Matt Stoller, antitrust activist: While courts or Congress might act arbitrarily, the hype machine around cryptocurrencies has already turned to artificial intelligence, a useful technology. In this context, the only question for crypto-flag bearers is whether they can offer any utility beyond money laundering and speculation.
What message do these lawsuits send to other cryptocurrency exchanges?
If you’re a US-based cryptocurrency exchange, should you be worried?
Frye : Yes. The SEC has made it clear that it is taking action, but this is not what the SEC wants to be doing. It’s a problem.
Selig: The SEC’s enforcement arm has been clear in its message: “We agree with SEC Chairman Gensler’s view that most crypto assets are securities.” The agency now claims that most of the top 10 crypto assets by market cap are securities, but specifically excludes Bitcoin and Ethereum.
However, the law is not settled and there will be disputes in a large number of lawsuits, including those against Coinbase and Binance. The agency is expending a great deal of resources to challenge Coinbase and Binance. In the short term, the SEC is unlikely to bring too many lawsuits related to crypto asset exchanges. Crypto asset exchanges must continue to assess whether each crypto asset is a security based on its specific circumstances.
There are several accusations against Binance. If true, the exchange will be in trouble, including allegations of wash trading and practices that put customers at risk (some reminiscent of FTX).
Is there reason to be concerned about using this exchange in the future?
Frye: I don’t know, maybe?
Will there be more disruptive lawsuits against the crypto industry than these two?
Frye: Everyone in crypto is complaining about Gary Gensler. I’m against his regulatory approach too. But what if the head of the SEC was Lina Khan (head of the Federal Trade Commission/FTC)? Or more realistically, what if Lina Khan decides that the FTC should regulate crypto products? Good luck, you’ll be begging for Gary to come back.
Smith: Unfortunately, yes, it’s obvious that Chairman Gensler has blatantly disregarded his agency’s mission to protect investors. Just this week, the SEC indirectly declared crypto assets worth about $120 billion as securities. How does that protect investors, while trying to wipe out the market for these tokens?
Will the lawsuits lead to one or two of Binance and Coinbase exiting the US?
Frye: Possibly. Based on the content of the lawsuits, I think there is a real possibility that Binance will exit, but Coinbase is unlikely to do so. Coinbase has done everything it can to comply with SEC rules and expectations, even if the SEC itself has behaved improperly.
What do you think of Gary Gensler’s statement that the world doesn’t need digital currency?
Why does Gensler make regulatory statements about this industry instead of focusing on his actual job responsibilities?
Smith: Gensler seems to have played all of his cards: he believes that the US should not have a digital currency. He clearly understands the technology and has been willing to explore its potential in the past. He also understands the business of publicly traded companies like Coinbase, whose products and services have been approved by the SEC, and he understands these companies’ financial disclosure obligations. Therefore, without more information, observers can only speculate on Chairman Gensler’s motivations.