How will SEC’s lawsuit against Coinbase and Binance change the crypto industry?

Once upon a time, in the bustling world of cryptocurrencies, there were two giants that dominated the scene: Binance and Coinbase. Their platforms enabled millions of people worldwide to trade digital currencies, and their influence covered the entire crypto market. However, as their power grew, so did the scrutiny they faced.

In early June 2023, the United States Securities and Exchange Commission (SEC), a powerful force in the financial world, turned its sights on these two crypto giants. The SEC accused Coinbase and Binance of violating regulations that required them to register as exchanges and be subject to oversight by federal agencies, and so it filed lawsuits against them. Specifically, the SEC accused Coinbase of trading at least 13 crypto assets that were actually securities and should have been registered with regulatory agencies before they were issued. These assets included well-known tokens such as Solana, Cardano, and Polygon. The basis for these charges was that because Coinbase enabled trading of these tokens, the SEC deemed them securities and the company should have registered as an exchange, broker, and clearinghouse.

This lawsuit is the culmination of two years of effort by SEC Chairman Gary Gensler, who wants to shift his agency’s enforcement strategy in the crypto world from issuers of individual tokens to online platforms that trade these assets. Companies like Coinbase enable customers to transfer dollars from their bank accounts to buy or sell cryptocurrencies, a far cry from the days when potential traders had to find each other on message boards or similar clunky forums, agree on prices, and hope their trading partners were honest.

Gensler warned that crypto exchanges need to register with the SEC. Such companies handle functions that some securities exchanges can’t, including holding customer assets and clearing trades. His solution is to have crypto exchanges separate their order execution, brokerage, and clearing functions, a structure that would better reflect the way Wall Street operates, with stock exchanges, brokers, and clearinghouses operating as independent businesses subject to rules tailored to their operations and risks.

Cryptocurrency exchanges pushed back against Gensler’s call for them to reshape themselves in the image of Wall Street. They also argued that many tokens are not securities, and token developers cannot offer financial disclosures like a listed company. This did not convince Gensler or his enforcers. Gensler said on Tuesday’s CNBC show, “Without proper disclosure, the public can’t answer the question of whether this is a scam or something else.”

The impact of the SEC’s charges was immediate. Coinbase’s stock fell 17% in early trading, sending ripples through the crypto market. Binance felt the sting as well, with the SEC sending a clear signal: the era of unregulated cryptocurrency trading is coming to an end. Cryptocurrency exchanges have begun reviewing their practices in hopes of avoiding the fate of Binance and Coinbase. For ordinary investors, the charges have sparked a wave of anxiety. The future of cryptocurrencies, once seen as the new frontier of financial freedom, now seems uncertain. Many are worried if the next Bitcoin bull market will still come, and the increased regulation may cast a shadow over the future growth of the industry.

Under increasing regulatory pressure, Coinbase launched a series of legal and public relations efforts to tell lawmakers that the SEC is playing a power game against a new technology that doesn’t fit its rules. Some Republican House members sympathized with Coinbase’s concerns, and Coinbase’s Chief Legal Officer, Blockingul Grewal, plans to testify before the House Agriculture Committee on Tuesday, which has been considering whether to treat some crypto assets as commodities rather than securities.

However, amid this turmoil, some voices within the industry expressed cautious optimism. Aaron Kaplan, Co-CEO and Co-Founder of Prometheum Inc., sees the SEC’s action as a meaningful step towards the regulated market infrastructure for cryptocurrencies and told Coindesk that he believes it will ultimately help move the industry forward. He expects the competitive landscape to be different, but this will have a net benefit for US investors and should allow innovation to thrive.

Others, like Richard Mico, CEO and Chief Legal Officer of Banxa US, pointed out the negative impact of the ongoing lack of regulatory clarity. He warned in an interview with Coindesk that the current situation could drive digital asset firms out of the US and towards more friendly jurisdictions, potentially depriving domestic jobs and innovation in the US.

Dan Raju, CEO of fintech company Tradier, told Blockworks that greater and clearer regulation of cryptocurrency by the SEC is imminent. He believes that while these changes may have a short-term impact on cryptocurrency prices, they will create conditions for retail confidence in cryptocurrency in the long-term.

Despite the challenges, industry insiders express confidence in the resilience and innovative potential of the cryptocurrency industry. Their views reflect a cautious optimism, a belief that the industry can adapt and evolve despite regulatory obstacles.

However, not all views are positive. Kristin Smith of the Blockchain Association is unhappy with the SEC’s latest attack, pointing out that the regulatory agency does not “make law — it just brings charges.”

As the industry responds to the consequences of the SEC’s charges, the future of cryptocurrency remains uncertain. However, what is certain is that the next few years will be a decisive period for the cryptocurrency industry, with the whole world watching closely.

Author: Susan Feng, Bitpush News

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