The US Securities and Exchange Commission (SEC) sued cryptocurrency platform Coinbase shortly after launching a lawsuit against the world's largest cryptocurrency exchange, Binance.
This is not the first time Binance and Coinbase have noticed SEC attention, not even the first time this year. But latest charges they are much more seriousincluding allegations that exchanges are operating without proper registration.
Both cases boil down to whether or not cryptocurrency tokens should be classified as "securities," such as stocks, and regulated in the same way. Binance and Coinbase have come out in favor of the regulation. And more crypto companies believe that by taking legal action instead of creating clear rules, the SEC has not provided enough guidance to the industry, creating uncertainty for individuals and companies.
Since Gary Gensler became SEC chairman in April 2021, he has regularly testified before Senate committees on the need for more personal to regulate cryptocurrencies, calling the market a "wild Westโ. On the other hand, he has also said that he has no plans to ban cryptocurrencieswhile the SEC approved the first Bitcoin ETFs in 2021, as well as Coinbase stock listing that same year.
But now the SEC has filed 13 charges against Binance and its founder Changpeng Zhao, as well as a motion to freeze assets belonging to the US subsidiary of Binance (Binance is based in the Cayman Islands). The SEC also accused both Binance and Coinbase of operating unregistered exchanges and offering to sell unregistered securities in the form of crypto tokens.
Binance has committed to vigorously defend against the lawsuit, which he said reflected the SEC's "misguided and knowing refusal" to provide guidance and clarity on regulating the cryptocurrency industry.
Coinbase's chief legal officer said in a statement to CNBC on charges that "the SEC's reliance on a compliance-only approach in the absence of clear rules for the digital asset industry is hurting the economic competitiveness of the United States and companies like Coinbase that have a demonstrated commitment to compliance."
He called for legislation that "allows fair rules of the road to be developed in a transparent manner and applied equally, not litigation."
counting the costs
These cases are similar to others brought against a cryptocurrency company called Ripple Labs by the SEC in December 2020. It argues that XRP, Ripple's cryptocurrency token, is an unregistered security. Ripple disputes it and expects to spend $200 million (ยฃ156 million) fighting the lawsuit. according to its CEO. He argues that such cases are impeding US innovation around the blockchain technology that powers cryptocurrency trading.
At the center of this case is the question of whether Ripple's token satisfies Howey's test, which would consider it a security, just like a stock or bond, for regulatory purposes. The test establishes three key criteria for deciding whether a financial product should be subject to securities regulations:
- it is a financial investment, which means that the participants in the transaction must risk their own money
- is a joint venture, so the financial success of the investors must be connected in some way
- there is an expectation of profit solely from the efforts of others.
According the second, the first criterion is easily satisfied with cryptocurrencies because fiat money or other digital assets are exchanged. Similarly, the โcommon companyโ test is also easily met when trading cryptocurrencies. The third criteria is largely based on whether digital assets come with an "expectation of earnings to be realized." from the efforts of othersโ.
Why does this matter?
The most recent SEC lawsuits against Binance and Coinbase go after the lifeblood of the cryptocurrency industry: the exchanges or platforms that people trade on, as opposed to individual digital assets or tokens. These platforms allow investors to easily buy and sell cryptocurrencies without the need for expert knowledge of how blockchains work.
The lawsuits have had an immediate and significant impact on crypto values. Coinbase clients pulled around $1.28 billion from the exchange after the news broke, according to initial estimates by the data firm. nansen. Coinbase's parent company, Coinbase Global Inc. (COIN.O)saw its shares close down $7.10, or 12.1%, at $51.61, after falling as much as 20.9% on the day the charges were announced.
Meanwhile, customers withdrew about US$780 million from Binance and its US subsidiary within 24 hours of the lawsuit, according to Nansen. The Bitcoin market has since recovered, although Binance.US has stopped trading in several of its cryptocurrencies.
These latest lawsuits look like US regulators are drawing a line in the sand. If successful, these cases will limit US investors' access to assets on these platforms and will also create more market uncertainty for companies and individuals.
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Global coordination on cryptographic rules
Studies show about 17% of people in the US have traded, invested in, or used a cryptocurrency. If a crackdown from regulators cuts off their access, these people can use centralized exchanges in other countries, decentralized exchanges, or other means to trade cryptocurrencies.
But regulators of other major financial markets could follow the SEC's lead when it comes to crypto rules. The UK Financial Conduct Authority recently announced new regulations for cryptocurrencies companies operating in the country. This includes measures to ensure that investors are aware of the risks involved, that advertisements are clear and not misleading, as well as a ban on "refer-a-friend" bonuses. But these rules will only affect cryptocurrency trading in the UK, so it's a relatively small step.
Cryptocurrency providers seem to want regulation that provides legitimacy and clear parameters to work within. Given the borderless nature of cryptocurrencies, regulators need to align internationally or exchanges will simply move to โfriendlierโ jurisdictions. Global leadership is needed to establish how, and if, cryptocurrencies should be regulated. Without this, regulators like the SEC will have a hard time corralling the growing global crypto market.
