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After years of making bold statements about cryptocurrency, Gary Gensler, the Chair of the U.S. Securities and Exchange Commission (SEC), has finally taken decisive action.
A significant amount of involvement.
This week, the regulator known for his skeptical stance on cryptocurrencies took legal action against Binance and Coinbase. Throughout his term, he has suggested that proof-of-stake tokens can be classified as securities, hinted at the illegitimacy of all crypto exchanges, and suggested that nearly all cryptocurrencies can be considered "investment contracts" under the Howey Test, a benchmark used to determine whether financial assets qualify as securities.
Facing off against the world's largest cryptocurrency exchange (Binance) and the largest publicly-traded crypto company (Coinbase), Gensler is undoubtedly preparing for a formidable battle. Several months ago, Coinbase CEO Brian Armstrong hinted that the SEC was constructing its argument, and should a lawsuit be filed, the exchange would strongly retaliate.
Gensler's federal enforcement action has the potential to reach the U.S. Supreme Court, making it a significant legal battle. The case involving Coinbase, a popular exchange utilized by tens of thousands of U.S. citizens (which went public shortly before Gensler's confirmation), might ignite legislative action concerning cryptocurrency regulation. Moreover, the extensive allegations against Binance, if proven true, could jeopardize what is arguably one of the most lucrative businesses of the 21st century thus far.
These are the uncertainties that are already known. However, the SEC's dual actions this week have also unveiled fresh insights into the agency's stance on cryptocurrency and the reasons behind its assertive approach.
CoinCryptoUs has contacted several legal authorities and cryptocurrency experts in order to gain a deeper understanding of the potential developments in these cases and their implications for the future of the industry. The ensuing roundtable discussion presents a wide range of perspectives on this uncertain situation, characterized by numerous complex factors in motion.
Are there any grounds for the companies to be hopeful regarding the lawsuits?
Brian Frye, attorney: Indeed, perhaps, I hold a pessimistic view regarding the SEC's case against Binance. The complaint is undeniably harsh, as Binance has essentially acknowledged the validity of all the allegations made by the SEC. It is an absolute calamity.
In my opinion, Coinbase holds a stronger position. It has made consistent efforts to adhere to the SEC's regulations for a considerable period, yet the SEC has shown reluctance to acknowledge Coinbase's sincere attempts at compliance. I find this situation unfavorable, and it is possible that certain courts may raise objections to it.
Courts anticipate agencies to adhere to predictable behavior. Coinbase has consistently sought clarification from the SEC regarding its expectations, but the SEC has persistently declined to provide a response. Consequently, this situation might portray Coinbase as the responsible party while casting the SEC in a negative light.
Furthermore, it is concerning that the SEC has yet to offer any reasonably coherent elucidation regarding its intended scope of regulation, its perceived authority to regulate, the rationale behind its regulatory aspirations, the proposed regulatory approach, the desired outcomes of its regulations, or any concrete details whatsoever.
Despite its long-standing stance against crypto assets, the SEC has remained frustratingly silent about the reasons underlying its disapproval. Not only has it neglected to explain the perceived problems associated with these assets, but it has also failed to present a coherent regulatory approach that aligns with its mandated responsibilities.
"It’s a security if the SEC wants to regulate it – Brian Frye"
This poses a significant issue. Credibility is crucial for regulatory agencies, and unfortunately, the SEC currently faces credibility challenges. While it may assert its authority and inflict substantial immediate challenges for crypto companies, it must also consider the long-term consequences.
The SEC has recently faced legal reprimands for exceeding its jurisdiction concerning Administrative Law Judges (ALJs). It wouldn't be surprising if the courts closely scrutinize its stance on crypto assets, particularly when it comes to businesses making sincere compliance efforts but facing resistance from the agency.
Mike Selig, attorney: The SEC lawsuits bring about some positive implications for the crypto industry. Amidst these legal actions, foreign jurisdictions are embracing crypto-related laws and regulations, while U.S. lawmakers are actively discussing legislation concerning the structure of the crypto market. Each time the SEC files a lawsuit against a crypto business, particularly one that has been transparent about its efforts to adhere to relevant laws and regulations, it intensifies the political pressure on U.S. lawmakers to enact sensible crypto legislation.
The lawsuits serve as a catalyst for compliant businesses to consider relocating outside the U.S., as foreign jurisdictions warmly embrace them and offer a new framework of laws and regulations. However, there is room for optimism regarding the recent SEC lawsuits directed at two major crypto enterprises. These legal actions can prompt Congress to acknowledge that the SEC's enforcement-focused regulatory approach is ineffective and that comprehensive legislation is necessary. Otherwise, the industry risks migrating to jurisdictions that provide a more accommodating environment.
Kristin Smith, Blockchain Association CEO: The recent actions taken by the SEC provide a clear and pressing indication: Congress must take immediate action. The introduction of the Digital Asset Market Structure discussion draft last week by Rep. Patrick McHenry, chairman of the House Financial Services Committee, and Rep. Glenn Thompson, chairman of the House Committee on Agriculture, represents a positive advancement in the journey towards implementing effective regulation. It is of utmost importance that the United States maintains its competitiveness, particularly as other nations globally are actively pursuing responsible regulation of cryptocurrencies.
Do you anticipate any near-term changes in the business strategies of Binance or Coinbase?
Frye: Yes and no. The lawsuits exemplify my long-standing assertions, which unfortunately go unheard by many. The question of whether something is considered a security is not purely ontological. Rather, it depends on the SEC's inclination to regulate it. Therefore, the crucial query becomes what the SEC intends to regulate, the underlying reasons behind its regulatory objectives, how companies can adhere to the SEC's regulations, and ultimately, whether any of it is logical or reasonable.
Selig: To borrow a line from Battlestar Galactica, 'All of this has happened before. All of this will happen again.' Over the years, the SEC has been steadily constructing legal frameworks surrounding the classification of crypto assets as securities and determining appropriate registration categories for different intermediaries involved in the crypto space. The recent lawsuits against Coinbase and Binance serve as the culmination of previous developments. While these cases may not introduce groundbreaking insights into the SEC's perspective on cryptocurrencies, they do offer valuable insight for those seeking to comprehend the agency's stance. If one wishes to gain an understanding of the SEC's outlook on crypto, these complaints are worth delving into.
Could the current situation potentially lead to the implementation of regulations that could either ban the majority (if not all) cryptocurrencies or impose stringent registration and other obligations on them?
Frye: Indeed, I have reservations about that possibility. Personally, I believe it's more probable for the SEC to impose stricter regulations on the introduction of new cryptocurrencies.
Selig: It is highly improbable that the present circumstances will lead to legislation or regulations that effectively prohibit cryptocurrency assets in the United States. Officials and policymakers worldwide acknowledge the vast potential of crypto as a technology and are actively crafting rational legal frameworks for this asset class. Although the United States might be a bit behind, it will eventually join in the excitement. Every innovative investment product, ranging from renewable energy credits to credit default swaps, undergoes a phase of regulatory scrutiny before being recognized as a duly regulated and validated asset class. Cryptocurrency will follow a similar trajectory.
Is there anything you believe is lacking in the current public discussion concerning crypto legislation?
Matt Stoller, antitrust activist: While the courts or Congress may engage in unpredictable actions, it appears that the crypto industry's attention has shifted towards AI, a promising technology that, despite its considerable hype, holds significant value. Therefore, the crucial query for enthusiasts of cryptocurrency is whether they can present a practical application beyond its association with money laundering and speculation?
What kind of signal do these cases convey to other cryptocurrency exchanges? If you were a crypto exchange based in the United States, would you feel concerned?
Frye: Yes, the SEC is indeed taking action, but unfortunately, it falls short of the SEC's intended goals. This discrepancy poses a significant issue.
Selig: The message from the SEC Enforcement Division is explicit: “We generally agree with SEC Chair Gensler’s view that most crypto assets are securities.” This assertion is supported by the agency's categorization of most of the top-ten crypto assets by market capitalization as securities, with the notable exception of bitcoin and ether.
However, the legal landscape remains uncertain and will be subject to extensive litigation through various lawsuits, such as the ongoing cases involving Coinbase and Binance. The SEC is allocating substantial resources towards these litigations. It would be unexpected to witness a significant number of additional cases pertaining to crypto asset exchanges initiated by the SEC in the foreseeable future. It is imperative for crypto asset exchanges to persistently assess whether each individual crypto asset qualifies as a security, considering the distinctive facts and circumstances associated with each specific asset.
If the accusations against Binance, such as wash trading and potentially risky practices that resemble FTX, are indeed true, it would be extremely concerning. Consequently, is there a legitimate reason to be worried about utilizing the exchange in the future?
Frye: I'm not entirely sure, but perhaps the answer could be yes.
Could there be a more detrimental SEC Chair for the crypto industry than Gary Gensler? (In other words, what could potentially pose an even greater threat to crypto than these two scenarios?)
Frye: There is widespread discontent within the crypto community regarding Gary Gensler, and I share the same reservations about his regulatory approach. However, it is worth considering the potential consequences if Lina Khan, the head of the Federal Trade Commission, were to become the head of the Securities and Exchange Commission (SEC) or if she decided that the FTC should oversee crypto offerings. In such a scenario, you might find yourself longing for the leadership of Gary Gensler.
Smith: Regrettably, it is evident that Chair Gensler demonstrates a blatant disregard for his agency's core mission of safeguarding investors. Just this week, the SEC indirectly classified approximately $120 billion worth of crypto assets as securities. One must question how the elimination of a market for these tokens aligns with the goal of protecting investors?
Could the lawsuit potentially result in the shutdown of either Binance, Coinbase, or both, in the United States?
Frye: Certainly. I believe it is highly probable for Binance, considering the complaint, but highly improbable for Coinbase, as it has consistently strived to adhere to SEC regulations and fulfill their expectations, even in instances where the SEC has acted improperly.
How do you interpret Gary Gensler's remark suggesting that digital currencies are unnecessary since the dollar, euro, and yen are already digital? Why does Gensler prioritize making evaluative statements about the industry instead of concentrating on his designated responsibilities?
Smith: Gensler seems to have revealed his stance: he opposes the existence of digital currencies in the United States. It is evident that he possesses knowledge about the technology and has previously shown interest in exploring its possibilities. He also demonstrates an understanding of publicly traded companies like Coinbase, the SEC-approved products and services, and their responsibilities regarding financial disclosures. However, in the absence of further information, onlookers are left questioning Chair Gensler's motives.
