SEC Goes After Crypto Exchanges In 2023, they filed two harsh complaints against Coinbase and Binance within a 24-hour period, alleging that they ran unauthorized securities exchanges in the United States. The actions mark a significant uptick in the SEC’s effort to control a market that has long operated in a legal shadow.
The repercussions were severe for Coinbase, as its stock encountered a merciless pummeling on Tuesday, plummeting by over 12%. Likewise, Binance faced the exodus of nearly $800 million in investments from its platform within that same 24-hour span.
Why SEC Goes After Crypto Exchanges In 2023
These lawsuits have set the stage for protracted legal battles, potentially spanning months, or even years, until resolutions are reached.
Meanwhile, countless American investors and proponents of digital assets find themselves caught in a state of limbo. The burning question that engulfs their minds is whether any safe havens remain for crypto trading.
Bloomberg columnist Matt Levine posited a prudent rule of thumb, suggesting that all cryptocurrency exchanges partake in unlawful activities, and if fortune favors you, your chosen exchange is merely engaged in procedural transgressions.
To elaborate, from the standpoint of the SEC, the preeminent regulator of Wall Street, nearly every crypto exchange operating within the United States is deemed illegal. This classification stems from the regulator’s view that virtually all crypto tokens, except for bitcoin (which will be discussed later), fall under the purview of securities. Engaging in securities-related activities necessitates proper licensure.
Coinbase, however, puts forth a reasonable argument asserting that the SEC already sanctioned its business model when granting approval for its public debut in 2021. Moreover, the company claims to have diligently collaborated with regulatory bodies to ensure strict adherence to legal requirements.
Coinbase CEO Brian Armstrong voiced the frustration of being unable to find a viable path for registration, reiterating this sentiment through a series of tweets on Tuesday. He lamented, Instead of presenting a lucid regulatory framework, the SEC has adopted an enforcement-oriented approach. Thus, if resorting to legal recourse is necessary for gaining clarity, so be it.
Murky regulations
The absence of regulatory clarity frequently elicits dissatisfaction among cryptocurrency firms, contending that the United States is compelling the industry’s relocation abroad and relinquishing control to foreign regulators who have established more explicit guidelines.
While that viewpoint may hold some truth, Gary Gensler, the outspoken critic of cryptocurrencies and the prominent overseer at the Securities and Exchange Commission (SEC), appears indifferent to such concerns.
Allow me to elucidate: Gensler expressed, during an interview with CNBC on Tuesday, his belief that the proliferation of digital currencies is unnecessary. According to him, we already possess digital currencies, namely the US dollar, the euro, and the yen. All of these currencies exist in digital form at present. Moreover, digital investments are already prevalent.
Gensler’s message to investors is clear: the SEC is committed to their protection.
The investing public benefits from the application of US securities laws. Cryptocurrencies should be held to the same standard, and these platforms and intermediaries must adhere to regulatory compliance, he emphasized.
The SEC’s simultaneous pursuit of civil cases establishes the foundation for potential legal action and subsequent judicial review, which could compel Congress to take action.
Analysts at TD Cowen expressed their enduring belief that only Congress possesses the authority to bring an end to the policy turbulence that has enveloped the cryptocurrency sphere over the past year.
They contend that regardless of the judge’s ruling, this litigation might not bode well for Coinbase but could positively impact the overall crypto space by propelling it closer to definitive regulatory guidelines.
In the interim, Reena Aggarwal, the director of Georgetown University’s Psaros Center for Financial Markets and Policy, advises US investors to exercise caution when selecting platforms for cryptocurrency trading. She firmly believes that US regulators are pursuing crypto firms with great vigor and expects this stance to remain unchanged.
Aggarwal identifies Bitcoin and ether futures traded on the Chicago Mercantile Exchange as safer options due to the exchange’s regulated status. Additionally, she mentions the availability of Exchange-Traded Funds (ETFs) linked to Bitcoin futures offered by traditional financial firms.
Remarkably, despite the ongoing regulatory crackdown, Bitcoin, the world’s premier and most popular cryptocurrency, experienced a surge on Tuesday. This can be attributed, in part, to the SEC’s classification of Bitcoin as a commodity falling under the purview of the Commodity Futures Trading Commission (CFTC).
After a 6% decline on Monday, Bitcoin rebounded on Tuesday, surpassing the $27,000 mark in afternoon trading.
Ed Moya, a senior market analyst at Oanda, notes that many crypto investors seem to be abandoning alternative cryptocurrencies, commonly known as “alt-coins,” and instead remaining loyal to the relatively more reliable original virtual currency.
To sum it up: Moya suggests that the SEC’s actions resemble a game of Whac-A-Mole when it comes to regulating crypto exchanges. Consequently, crypto investors must carefully consider their confidence in the continued availability of trading options across various exchanges.
Undoubtedly, uncertainty prevails. Nonetheless, it is worth highlighting that crypto trading, even under the most favorable circumstances, has always demanded nerves of steel due to its inherently high-risk nature.
SEC sues Coinbase for allegedly acting
Coinbase has illicitly generated billions of dollars by facilitating the trade of crypto asset securities, as stated in a press release by the Securities and Exchange Commission (SEC) dating back to 2019. The SEC pointed out that Coinbase has combined the conventional roles of an exchange, broker, and clearing agency without fulfilling the necessary registration requirements mandated by the Commission.
The failure of Coinbase to register has resulted in the deprivation of significant investor safeguards, according to the SEC. In response, Brian Armstrong, the CEO of Coinbase, expressed on Twitter his pride in representing the industry in court to obtain clarity regarding cryptocurrency regulations. However, Armstrong also criticized the SEC for approving Coinbase’s business operations during its public listing in 2021.
Armstrong emphasized that there was no viable option for Coinbase to register, despite repeated attempts. He further lamented the SEC’s approach of enforcing regulations without providing a clear set of guidelines, which he believes is detrimental to the United States. Should it be necessary to seek clarity through legal channels, Coinbase is prepared to take that course.
Paul Grewal, Coinbase’s chief legal officer, echoed Armstrong’s sentiments and suggested that the ideal solution lies in legislative measures that promote transparent development of fair rules for the industry, rather than relying solely on litigation.
On Tuesday, the shares of Coinbase experienced a decline of more than 12%. The lawsuit against Coinbase follows a similar complaint filed by the SEC against Binance, the world’s largest cryptocurrency exchange. In the 24 hours following the SEC’s lawsuit against Binance, investors withdrew approximately $790 million from the platform and its US affiliate, according to data firm Nansen.
Binance witnessed a net outflow of $778.6 million in crypto tokens on the ethereum blockchain, while Binance.US, its US affiliate, recorded net outflows of $13 million, as reported by Nansen on Twitter.
In response to the SEC’s allegations, a spokesperson for Binance expressed the company’s serious consideration of the claims. However, they argued that the accusations were unjustified and that Binance was being targeted due to its size and prominent reputation.
The escalating regulatory crackdown has left crypto investors apprehensive, particularly following the collapse of FTX, a once-promising platform that is now the subject of a significant federal fraud investigation. Since then, the prices of digital assets have plummeted, prompting intensified scrutiny from regulatory bodies.
Crypto companies have consistently opposed the classification of their products as traditional securities or commodities, asserting that they represent an entirely new form of digital asset requiring customized rules and regulations. The SEC, in contrast, maintains that most crypto offerings should be regulated in the same manner as stocks and bonds on Wall Street. The lawsuits against two prominent players in the crypto industry could potentially serve as catalysts for addressing regulatory concerns through litigation and subsequent judicial reviews, ultimately motivating Congress to take action.
According to analysts at TD Cowen, while the litigation may not favor Coinbase directly, it could lead to positive outcomes for the broader crypto space by bringing it closer to establishing definitive regulatory guidelines, irrespective of the court’s ruling.
