Cyptocurrency and digital coin exchanges push traditional boundaries of finance and securities, so they are well-acquainted with volatility. But recent events could take levels of cryptocurrency instability even further. In a not-so-unexpected turn of events, the Securities and Exchange Commission (SEC) filed lawsuits against two of the biggest cryptocurrency players. Binance and Coinbase appear to be the focus of the SEC’s crypto crackdown at present. But in all likelihood, this is only the beginning. Many experts anticipate many more will follow depending on the outcome of these proceedings.
The underlying issue at present for cryptocurrency and digital coin exchanges relate to the definition of digital assets in general. According to the SEC, these assets are securities and should be registered and treated as such. But others fail to see this logic and claim digital assets are not securities and should fall under a different set of regulations. Despite efforts to encourage new rules and legislation but crypto players, such regulations do not yet exist. Now, they face the wrath of an SEC’s crackdown on crypto through the judicial system instead. How this plays out in the courts will likely determine cryptocurrency’s fate. And here too opinions differ in what these outcomes will be.
“It’s important to note that recent regulatory actions are aimed at ensuring that companies operating in the cryptocurrency industry are complying with securities laws and protecting investors – this will always be their goal.” – Joshua Chu, Chief Risk Officer at XBE, Coinllectibles and Marvion, a Group of Blockchain Technology Firms
The SEC’s Case Against Coinbase
The lawsuit filing against Coinbase is somewhat intriguing given the history behind the action. About a year prior, Coinbase filed a petition with the SEC requesting that new rules be defined for cryptocurrency and digital exchanges. But no action was taken by the SEC, resulting in Coinbase filing its own lawsuit against the SEC for inaction. This suit was only filed in April, and now two months later, Coinbase finds itself in the SEC’s crackdown on crypto. Despite its SEC petitions and Congressional lobbying, Coinbase now faces potential judicial action. In addition, Coinbase has reportedly suffered a net outflow of $1.28 billion customer losses since the lawsuit was filed.
The basic gist of the SEC’s crackdown on crypto at Coinbase involves a dispute on the definition of digital assets themselves. The SEC, believing cryptocurrency represents financial securities, accuses Coinbase of being an unregulated broker. In other words, Coinbase failed to register the digital assets they sold and avoided required disclosures to investors. Because these assets are equated to securities, the SEC is accusing them of violations. The billions of dollars that Coinbase received through cryptocurrency and digital exchanges is thus at risk as a result. Coinbase naturally denies any wrongdoing and plans to fight the lawsuit aggressively.
“The two cases are different, but overlap and point in the same direction: the SEC’s increasingly aggressive campaign to bring cryptocurrencies under the jurisdiction of the federal securities laws.” – Kevin O’Brien, Partner at Ford O’Brien Landy
The SEC’s Case Against Binance
In many ways, the lawsuit against Binance is similar to that against Coinbase. The SEC’s crackdown on crypto as it relates to Binance also accuses the company of failing to register digital assets. The SEC appears to be worried for investors in this regard and the overall safety of cryptocurrency. Overall, this involves 10 different digital coins including BNB and others. But the accusations in this lawsuit extend well past failure to register securities. The SEC also states that CEO Changpeng Zhao funneled billions of dollars into a separate company that he owns. This accusation has some noted similarities to Sam Bankman-Fried dealings at FTX if it is indeed accurate. While the current lawsuit suggests Zhao was involved in civil fraud, criminal charges could actually follow.
In addition to these civil complaints against the cryptocurrency and digital exchanges firm, additional ones also exist. Specifically, the SEC states that Binance also misled investors about their system’s adequacy in providing key safeguards. As part of the SEC’s crackdown on crypto, they accuse Binance of not satisfactorily overseeing manipulative trading activities. Yet the company makes such a claim to its investors. These allegations have had a negative impact on Binance similar to that faced by Coinbase. Since the lawsuit, Binance has reportedly lost $790 million. This is noteworthy despite Binance being the largest among cryptocurrency and digital exchanges.
“The whole business model is built on a noncompliance with the U.S. securities laws and we’re asking them to come into compliance.” – Gary Gensler, Chairperson of the U.S. Securities and Exchange Commission
Judicial Versus Legislative Resolution
As might be expected, both Binance and Coinbase disagree with not only the SEC’s crackdown on crypto. But they also oppose the SEC’s viewpoint that likens crypto to a security. For some time, cryptocurrency and digital exchanges have sought new legislation to better define these issues. But unfortunately for these companies, Congress has not seen these issues as urgent. As a result, most experts anticipate that legislation is unlikely to be forthcoming anytime soon regarding new cryptocurrency regulation. And now, given that the SEC is pushing the issue, it’s more probable that these disagreements will be settled judicially.
Given this, it’s worth exploring what the likely verdict will likely be in these upcoming lawsuits against Coinbase and Binance. Should the SEC’s crackdown on crypto succeed against these two companies, then subsequent lawsuits will probably follow. But judicial winds are changing when it comes agency authority. In the past, it was standard procedure for the courts to defer to governmental agency authority. In the coming term, the Supreme Court will be revisiting this tradition in a more formal manner. Should this age-old doctrine be reversed, then the SEC may find itself in a much weaker position, and cryptocurrency and digital exchanges are more likely to prove their case. How this unfolds will be interesting to see. But at present, there’s little doubt that things will get uglier before the dust finally settles.