Why the SEC is going after crypto exchanges Coinbase and Binance : NPR

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Securities and Exchange Commission Chairman Gary Gensler listens during a meeting of key financial regulators at the U.S. Treasury Department on October 3, 2022, in Washington, D.C. The SEC lawsuit against crypto exchanges Binance and Coinbase this week aims to place both under the regulatory jurisdiction of the agency. Anna Moneymaker/Getty Images hide caption

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Securities and Exchange Commission Chairman Gary Gensler listens during a meeting of key financial regulators at the U.S. Treasury Department on October 3, 2022, in Washington, D.C. The SEC lawsuit against crypto exchanges Binance and Coinbase this week aims to place both under the regulatory jurisdiction of the agency.

Anna Moneymaker/Getty Images

Since Gary Gensler became Wall Street’s top cop two years ago, his message to cryptocurrency companies has been consistent: he would do whatever it takes to tame a world he likens to the “Wild West”. “.

This week, he delivered that threat, in a big way.

The Securities and Exchange Commission has unveiled a barrage of accusations against two of the world’s largest crypto exchanges, Coinbase and Binance, kicking off a legal battle that will help define the future of cryptocurrencies.

Here’s what to know about combat and why it’s so important.

What are these two cases about?

They stand to answer a crucial question: who has access to law enforcement crypto companies?

Although Binance and Coinbase are not household names, they are well known in the crypto world. Billions of dollars worth of digital assets change hands on these platforms every day, and they have customers all over the world.

Yet crypto, since its inception, exists in a regulatory gray area. After all, most current financial rules were defined before the creation of cryptocurrencies.

A turf war continues between the SEC and another federal regulator, the Commodity Futures Trading Commission (CFTC), over which the agency has the power to oversee these assets and the broader industry.

Gensler believes that most cryptocurrencies are securities, and as such, current laws give his agency the power to regulate them and the sites and apps they are bought and sold on.

While these two lawsuits are different in many ways, basically Coinbase and Binance are both accused of failing to register their trades with the SEC.

Binance Founder and CEO Changpeng Zhao poses during an interview at a tech startup and innovation fair in Paris on May 16, 2022. Binance and Zhao are facing a barrage of lawsuits from the SEC. Eric Piermont/AFP via Getty Images hide caption

Toggle caption Eric Piermont/AFP via Getty Images

Binance Founder and CEO Changpeng Zhao poses during an interview at a tech startup and innovation fair in Paris on May 16, 2022. Binance and Zhao are facing a barrage of lawsuits from the SEC.

Eric Piermont/AFP via Getty Images

This is something crypto companies have fought tooth and nail. By design, crypto is meant to operate outside of the traditional financial system.

What many crypto companies want are new crypto-specific rules of conduct.

If the SEC prevails in court, it could potentially force crypto companies to register with the SEC, which would be a sea change.

“I think these cases will be fundamental to the shape of crypto regulation,” says former CFTC chairman Timothy Massad.

What shall we do now?

In many ways, this is an existential struggle for these companies.

Binance, perhaps, is facing the most serious allegations, including that the exchange and its CEO, Changpeng Zhao, misled investors about the exchange’s ability to detect market manipulation, and that it misused funds. client.

Meanwhile, Stephen Glagola, an analyst at TD Cowen who covers Coinbase, which is a publicly traded company, said Coinbase could emerge from this fight “a significantly different business than it does today.”

These two companies have decided to fight the charges against them and are preparing for the long haul.

“We are operating as usual,” says Paul Grewal, chief legal officer of Coinbase. “These cases sometimes go unresolved for not just many months, but many years.”

The longer this drags on, the more it could color the way crypto investors view these two companies. And indeed, in the days following the announcement of these lawsuits, there were significant exits from Coinbase and Binance exchanges.

“It’s going to affect people’s attitude towards trading, and Coinbase is going to have to think about that,” Massad says. “Can he really afford to fight this, or does he have an incentive to try and find a settlement?”

What this means for the crypto world

It’s not just Coinbase and Binance. The lawsuits also threaten to create a lot of uncertainty and further erode confidence across the industry.

Coinbase and Binance join a list of crypto companies the SEC has taken action against, including Kraken, Genesis, and Gemini.

But Coinbase and Binance don’t just run exchanges, they also operate as brokers and clearing houses. It’s something you don’t see in traditional finance, and it’s a model that Gensler is skeptical of.

Coinbase CEO and Co-Founder Brian Armstrong speaks at the Milken Institute Global Conference on May 2, 2022 in Beverly Hills, California. Coinbase has pledged to fight SEC lawsuits. Patrick T. Fallon/AFP via Getty Images hide caption

Toggle caption Patrick T. Fallon/AFP via Getty Images

Coinbase CEO and Co-Founder Brian Armstrong speaks at the Milken Institute Global Conference on May 2, 2022 in Beverly Hills, California. Coinbase has pledged to fight SEC lawsuits.

Patrick T. Fallon/AFP via Getty Images

In crypto, sentiment is critical and the industry has struggled since last year, with the collapse of FTX.

Its now former CEO, Sam Bankman-Fried, faces civil charges from the SEC and CFTC, and the Justice Department has also filed criminal charges against him.

FTX’s dramatic collapse ushered in a so-called “crypto winter” that has yet to dissipate.

“I think the sentiment will likely continue to be somewhat negative around crypto,” Glagola asserts, noting that volumes of crypto traded have declined since FTX’s collapse and continue to deteriorate.

What could ultimately emerge?

There is an argument that this fight is good, or at least it will be constructive in that it is likely to lead to more clarity on the regulations.

“It’s an industry that I think can be characterized by a lack of transparency,” says Giagola. “There’s not a lot of transparency.”

It’s not just the courts that can help define the future of cryptocurrencies. Coinbase and other crypto companies, as well as the SEC, want Congress to get involved by passing laws for the industry, although action by lawmakers may take some time.

Cryptocurrencies such as Bitcoin have grown in popularity, although they are still nowhere near as widely held as stocks.

A recent research report estimated that 12% of the population owns crypto investments, a small fraction compared to the number of households that own stocks, for example.

More transparency and trust in the industry could ultimately lead to more investment in cryptocurrencies.

But the road there is likely to be messy.

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