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The U.S. Securities and Exchange Commission (SEC) dealt a decisive blow this week by filing lawsuits against both Binance and Coinbase. However, these actions did not come out of thin air. The regulatory conundrum surrounding cryptocurrency exchanges has been a simmering concern for quite some time. While the specific methods for regulation may be subject to debate, it was only a matter of time before the SEC set its sights on the prominent players in the field.
However, the SEC's recent actions are being perceived as reactive, politically motivated, and ultimately weak. The messaging surrounding these lawsuits attempts to categorize Coinbase and Binance alongside the fraudulent entities of 2022, like Luna, Celsius, and particularly FTX. It is worth noting that the SEC was widely criticized for its lenient treatment of FTX before its exposure as a massive fraud. Now, the SEC is trying to showcase its capability as a strict regulator, but it appears to be doing so belatedly and targeting the wrong entities.
In essence, the SEC is framing the ongoing lawsuits as a crusade against fraud, aiming to shape public perception accordingly. However, these legal actions are, in truth, a paternalistic endeavor aimed at dissuading individuals from making investments that the SEC deems unfavorable. This conflation of motives is undeniably unjust, not only to the companies being targeted, with Coinbase bearing the brunt of it, but also to the American public who rely on the SEC's expertise and guidance.
Crimes and sins
The SEC, along with other lawmakers and regulators, cannot be relied upon to differentiate between unlawful crimes and morally harmful acts that exploit individuals. Their role is to enforce regulations, not to dictate morality itself, but this does not imply that such distinctions are nonexistent.
The SEC’s core claim in its charges against Coinbase is simply that the exchange “has made calculated business decisions to make crypto assets available for trading in order to increase its own revenues, which are primarily based on trading fees from customers.”
"[I]t’s hard to escape the sense that [the Binance and Coinbase lawsuits]
are being framed as a do-over for the SEC’s and Gensler’s FTX missteps"
There is a nuanced discussion to be had regarding whether Coinbase could have adhered to the regulations in the manner the SEC insists. However, the crux of the SEC's allegation is that Coinbase violated the rules by offering a service that customers (myself included) actively utilized and subsequently attempted to enhance.
To rephrase the sentence, borrowing from Mae West, that thing may not be virtuous, but it's not a transgression either.
However, the charges against Coinbase are being excessively portrayed as safeguarding investors from a manipulative and dreadful predator. Gurbir S. Grewal, the director of enforcement at the SEC, has been quoted by the SEC on social media, claiming that “Coinbase’s calculated decisions allowed it to earn billions … at the expense of investors by depriving them of the protections to which they were entitled.”
In contrast, Binance has indeed faced accusations of engaging in actions that can be considered genuine wrongdoings, especially in terms of price manipulation that negatively affected its customers. However, some of the allegations directed at Binance seem to deny its rightful ability to offer services that are evidently desired by its customers.
If Grewal's proposed protections include regulations for reporting and transparency regarding assets, similar to the standards already in place in the stock market, it is evident that both U.S. and global exchanges would highly appreciate such a regulatory framework.
However, it appears that the SEC holds the belief that crypto exchanges are taking advantage of their customers by merely permitting them to make the seemingly foolish decision of purchasing cryptocurrencies based on their own free will.
‘We don’t need more digital currency.’
The SEC's lawsuit against Coinbase revolves around the unfounded assumption that cryptocurrency is inherently fraudulent and lacks value. This enables them to unjustly portray Coinbase CEO Brian Armstrong in the same light as Sam Bankman-Fried, despite the stark contrast between the two. While Armstrong has successfully operated a reliable and reputable platform for ten years, Bankman-Fried has proven to be an inept individual lacking both ethical principles and fundamental mathematical skills.
SEC Chair Gary Gensler further complicated the discussion during his appearance on CNBC this morning. Initially, he hinted at the SEC's alleged impartiality towards asset quality. However, he subsequently embarked on a comprehensive and frankly ill-conceived analysis of cryptocurrencies, asserting that "we don't need more digital currency, we 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."
This goes beyond a mere embarrassing misrepresentation; it is a fact that Gensler must be aware of. After all, he has imparted knowledge about blockchains to MIT students. It is implausible for him to genuinely believe that there is no differentiation between the banking infrastructure, which he and the U.S. government exert extremely oppressive, direct, and politicized control over, and decentralized monetary cryptocurrency networks that they lack control over, both presently and in the long run.
Gensler seems unequivocally determined to distort the fundamental truths for public consumption.
An embarrassment of entanglements
However, Gary Gensler found himself in a highly embarrassing situation regarding his association with Sam Bankman-Fried and FTX. It was revealed that Gensler's team had been engaging in ongoing discussions about cryptocurrency regulations with members of the FTX team. This close relationship may have hindered their ability to detect fraudulent activities. In fact, one congressman publicly held Gensler responsible for the wrongdoing at FTX. Although Gensler himself was not directly involved, Sam Bankman-Fried's appearances before Congress further fueled the perception that the FTX founder had privileged access to regulators.
Currently, although the SEC's accusations against Binance and Coinbase have valid justifications, it is difficult to overlook the notion that they are being presented as a chance for the SEC and Gensler to rectify their previous mishandling of FTX. Nevertheless, this does not imply that the situations are genuinely identical, and distorting this fact to the public may ultimately weaken Gensler's position in the future.
