A number of individuals have panicked and began to withdraw their investments from exchanges where they can and have not yet frozen, like Binance US, believing that the end of the cryptocurrency world has once again arrived, at least in light of the most recent news. But why is everyone in such a frenzy and what exactly happened? In order to obtain a better understanding of the issue, let’s look at the recent events and information that has surfaced.
An independent federal government regulatory body, the U.S. Securities and Exchange Commission (SEC), is in charge of safeguarding investors, ensuring the fair and orderly operation of the securities markets, and promoting capital formation. It served as the nation’s first federal securities market regulator after being established by Congress in 1934. The SEC encourages complete public disclosure, defends investors from dishonest and market-manipulating techniques, and keeps an eye on corporate takeover activities in the country. Additionally, it permits bookrunner registration declarations among underwriting companies.
Typically, in order to sell securities to investors, issuance of securities offered in interstate commerce, via mail, or online must first be registered with the SEC. To conduct business, financial services organizations like broker-dealers, advisory firms, and asset managers are required to register with the SEC. As an illustration, they would be in charge of approving any official bitcoin exchange.
The main responsibility of the SEC is to regulate entities and people involved in the securities markets, such as stock exchanges, brokerage houses, dealers, investment advisors, and investment funds. The SEC encourages fair dealing, the disclosure and dissemination of market-related information, and protection against fraud through established securities laws and regulations. Through its electronic data-gathering, analysis, and retrieval database, or EDGAR, it offers investors access to registration statements, periodic financial reports, and other securities documents.
Every year, the SEC files a large number of civil enforcement cases against companies and people who violate securities laws. Every significant case of financial malfeasance involves it, either directly or in collaboration with the Justice Department. The SEC typically prosecutes accounting fraud, the transmission of false or misleading information, and insider trading.
Following the Great Recession of 2008, the SEC played a key role in bringing legal action against the financial firms responsible for the catastrophe and giving investors billions of dollars back. It levied charges against 204 businesses or people in total, and it obtained close to $4 billion in fines, disgorgement, and other financial relief. For instance, Goldman Sachs paid $550 million, the highest fine ever for a Wall Street company and the second-largest in SEC history, only surpassed by WorldCom’s $750 million payment.
However, despite the fact that almost all of the brokers and top management involved in the crisis were never found guilty of serious crime, many observers have blamed the SEC for not doing enough to assist in prosecuting them. Only one Wall Street executive has been imprisoned thus far for crisis-related crimes. The remainder either consented to financial penalties or administrative sanctions.
The SEC charged Binance on Monday with exaggerating trade volumes, diverting customer funds, mixing assets inappropriately, failing to bar U.S. users from its platform, and deceiving users about its control measures.
According to allegations made by the SEC on Tuesday, Coinbase exchanged at least 13 cryptocurrencies that should have been registered as securities.
The SEC has now specifically designated a greater number of cryptocurrencies as securities as a result of the cases. This begs the issue of whether other exchanges, like Kraken, Gemini, Crypto.com, and Okcoin, which have also permitted trading of those tokens by American investors, would be subject to regulatory action, according to business leaders. The tokens in question may be delisted by some exchanges.
Jason Allegrante, chief legal and compliance officer of Fireblocks, a provider of digital asset infrastructure, said: “All U.S. exchanges should now be on notice that they may be subject to enforcement action if they permit, or have permitted, these tokens to be traded.”
Bitstamp, a cryptocurrency exchange, said in a statement that it takes “all new regulatory developments very seriously” and is “currently reviewing the new information that has come out this week to determine what actions to take.”
Both Coinbase and Binance have vowed to tenaciously defend themselves in court and reject the SEC’s accusations. The SEC chose not to respond.
The SEC, led by Gary Gensler, has consistently pushed its authority over the cryptocurrency industry, stating that most tokens satisfy the definition of a security and should be subject to the same stringent disclosure requirements. Although crypto firms first operated in a legally ambiguous environment.
According to information from the SEC website and consultant Cornerstone Research, the organization has filed over 130 lawsuits and settlements involving cryptocurrencies, and in several of those cases it has designated particular tokens as securities.
This week’s Coinbase and Binance lawsuits add other frequently traded tokens to that list, including as Solana, Cardano, and Polygon.
The Department of Justice may file further lawsuits in the coming weeks, according to Scott Freeman, co-founder of JST Digital, a financial services company that specializes in digital assets.
A Justice Department official declined to comment.
Because many tokens are more related to commodities than to securities, cryptocurrency companies like Coinbase and Binance contest the SEC’s authority and have frequently urged regulators to establish clear rules rather than establishing their authority through enforcement proceedings.
Securities are not listed by us. Our teams perform exhaustive risk and security evaluations, which involve an extensive legal and regulatory process, for every item we list. We will continue to keep a careful eye on this case and others for precedent-setting decisions, according to a Kraken representative.
A request for comment was not immediately answered by Gemini, Crypto.com, or Okcoin.
“THE CRYPTO ECONOMY MUST BE DESTROYED”
The judicial proceedings for the most recent lawsuits might last for years. For instance, an SEC lawsuit claiming that the XRP cryptocurrency from Ripple is a security is currently in court and has been for more than two years.
Executives said that regardless of the outcome of the lawsuits, the SEC is making it clear to the business community that it would not relent in its efforts. While large cryptocurrency companies can afford to fight the SEC, smaller businesses, like cryptocurrency exchange Beaxy, have gone bankrupt as a result of SEC enforcement proceedings.
“I don’t believe this SEC under this leadership really gives a damn whether they prevail in the courts or not. According to Stuart Alderoty, chief legal officer at Ripple, “I believe they are engaged in a coordinated campaign to essentially destroy the crypto economy in the United States.” Alderoty was speaking on Wednesday at the Piper Sandler Global Exchange & Fintech Conference in New York.
In an interview with CNBC on Tuesday, Gensler said a shake-up in the business would benefit investors.
“I think compliance will build trust and the business model might change,” he said, “if there’s a real value in these crypto tokens.”
About 90% of cryptocurrency trading, according to experts at Bernstein, already takes place outside of the United States. Executives predicted that exchanges will keep growing into foreign areas with more benevolent rules.
For instance, Coinbase previously stated that it would think about relocating its worldwide headquarters outside of the United States.
According to Katharine Wooller, business unit director at Coincover, a company that offers insurance for digital assets, “I would imagine that other firms spooked by the prevalent trend for regulation by enforcement will follow suit.”
The Securities and Exchange Commission’s onslaught of lawsuits against cryptocurrency exchanges this week appear to be an attack on the organization of the markets for digital assets, with smaller businesses possibly becoming targets if the agency succeeds in its case against the two market giants.
According to Kristin Smith, executive director of the Blockchain Association, “More actions wouldn’t surprise me.” “At the same time, I believe that Gary Gensler, chairman of the SEC, intended to convey this message by taking enforcement action against Coinbase.” If the SEC is successful in proving that the majority of cryptocurrencies are securities and that exchanges as a result are subject to its regulation, it is difficult to understand why the agency would restrict itself to Binance and Coinbase until Congress passes new rules that are more benevolent to the sector.
According to Kayvan Sadeghi, partner at Jenner and Block, other American cryptocurrency exchanges are still at risk even if the SEC is happy to focus on these two cases for the time being. “The way they are pleading these claims makes clear that the same allegations could be made against virtually any entity with a similar business model,” alleges Sadgehi. But it’s difficult to tell from the tea leaves whether they’re trying to target everyone simultaneously everywhere.
The brokering and trading of securities is the model under question. The issue is that there is little consensus regarding the existence of security in multi-billion dollar digital assets like ether, sol, ada, and hundreds of other smaller cryptocurrencies. The SEC has made it apparent that, with the exception of bitcoin, it views practically every crypto asset as a security through its enforcement actions and public comments from Gensler. By this reasoning, listing even one token on a crypto exchange in the United States might put it in violation of the agency’s regulations.
This poses a severe risk to other exchanges and digital asset issuers. In December 2020, the San Francisco-based payments business Ripple was sued by the SEC on the grounds that it offered investors $1.3 billion worth of the cryptocurrency XRP through an unregistered securities offering. This was the first enforcement action against a significant blockchain company, and as a result of the legal risk, many exchanges, including Coinbase, removed XRP from their lists. A number of the tokens included in the two suits this week, including sol, ada, and matic, are among the biggest in the sector and trade on almost all major exchanges not just in the United States but all over the world.
What will cryptocurrency companies do as a result? Many are still hesitant to speak. Forbes contacted several companies that are involved in trading and brokering digital assets, including Kraken, Gemini, Robinhood, PayPal, and Bitstamp. They either remained silent or refused to address the issue in public.
According to a senior executive of a well-known cryptocurrency exchange who requested anonymity in order to speak openly to Forbes, there is no straightforward way for their business to register with the SEC. Crypto exchanges include brokerage, clearance, and settlement, whereas traditional securities markets often confine their activities to providing a place for asset exchange.
The registration of an exchange as an Alternative Trading System (ATS), which functions similarly when it comes to the trading of securities, is one possible answer. In fact, the ATS model is specifically included in a recently filed bill in Congress to assist offer these same principles, but the legislation was drafted in the Republican-controlled House, so the Democrats may have concerns.
A small number of ATS are active in the crypto space, but they are not permitted to trade any assets that are not securities. According to Mike Cagney, CEO of Figure Technologies, which runs an ATS, “the ATS isn’t a magic solution for this.” A token project may attempt to register with the SEC as a security, but that would go against the decentralized nature of cryptocurrencies.
A spokeswoman for Circle, who together with Coinbase issued the stablecoin worth $29 billion USD, expressed optimism that the industry would be able to function under the new rules. These are long-anticipated steps, and Congress is about to seriously explore regulating the stablecoin and digital asset markets. The three arms of the American government have now essentially signaled their desire for legislation.
The SEC may not take significant action right away against other famous exchanges, but that does not imply it is not considering other targets in the future. Liquid staking and decentralized finance (DeFi) platforms are likely to be on the agency’s radar in terms of two crypto-related areas that have not yet seen major enforcement proceedings.
A unique financial engineering technique called liquid staking enables users to generate passive income while maintaining liquidity by posting tokens as collateral on a blockchain like Ethereum. The market is now worth $17.19 billion, while Lido, the biggest platform, is in charge of $13.36 billion in assets. Gensler has claimed that, at least based on his reading of securities legislation, proof of stake tokens may be equivalent to investment contracts. The SEC penalized Kraken $30 million in February, and the exchange decided to stop its staking program without apologizing.
Gensler has emphasized numerous times that a DeFi project’s mere designation as “decentralized” does not ensure that it is free from securities rules. DeFi, in Sadeghi’s opinion, “will be in the crosshairs.” According to him, the authorities could be able to classify some user-controlled cryptocurrency wallets as securities brokers because they are involved in trade routing according to specific terminology in the Coinbase complaint.
Congress may draft more specific regulations for digital assets in response to the SEC’s escalating activity, which would restrain the agency’s assault on the cryptocurrency industry. “The SEC’s rhetoric has clearly escalated in this most recent round of cases,” asserts Daniel Stabile, a partner at Winston & Strawn. The crucial question is whether a decision in one of these cases will be reached soon, as well as how that decision will be made in light of potential congressional action that would significantly limit the SEC’s ability to oversee this industry.
Binance.US has announced that it will remove select trading pairs and pause its Over The Counter (OTC) Trading Portal amidst a complaint filed by the U.S. Securities and Exchange Commission (SEC) on Monday. The changes will take effect on June 8 and will impact certain USDT, BTC, and BUSD Advanced Trading pairs.
We can already see that there are consequences to the SEC’s attacks and they are quite negative. We cannot know for sure what the outcome of these lawsuits will be, but we can be sure that these events will significantly hinder the bull market. What we can be absolutely certain of is that the SEC is not acting to protect the people, but is trying to impose an outdated legal system on modern currencies with more or less success. The situation is quite ridiculous, as you cannot currently register your cryptocurrency as a security because there is no guideline for it, but you can be sued in the blink of an eye if you fail to do so. Good story, eh?
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