Why Crypto Giants Binance and Coinbase Had a Very Tough Week

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It seems like just yesterday, cryptocurrency was being touted as the next big thing in expensive Super Bowl ads featuring big-name celebrities. The mood is markedly different this week after the Securities and Exchange Commission sued two of the biggest crypto exchanges, alleging they violated securities law.

The SEC’s charges against Binance and Coinbase vary in scale and scope, but both sets stem from increased regulatory scrutiny over the products these exchanges sell to consumers. This has been a major question mark, which has left the industry seeking clarification from the SEC and Congress on how the government views token trading, which has generated billions in transaction fees for these major markets. . Now they have their answer and it’s not the one they’re going to like.

According to the SEC complaints, Coinbase and Binance ignored their need to register with the SEC as exchange, brokerage, and clearing agency functions that are typically performed by three separate companies. Coinbase, which is based in the United States, is further accused of selling at least 13 crypto assets on its marketplace that count as securities. Binance and its founder, Changpeng Zhao, are also accused of misappropriating customer funds by mixing them with company finances and misrepresenting Binances’ US platform as an entirely separate platform under a an elaborate scheme to evade US federal securities laws. (Both companies have denied the allegations.)

At the heart of the crypto industry’s lawsuits and pushback is an unanswered question: is a token a security or a commodity? The first includes investment contracts like stocks and bonds, in which someone invests money in a business and expects to earn a profit. Commodities, on the other hand, are usually physical things that can be bought in bulk on exchanges like oil, corn, or wheat before they are actually produced.

The answer is important as to which regulatory body sets the rules for the industry. Although the SEC has jurisdiction over securities, the crypto industry would much rather see its products treated as such, particularly because they fall under the jurisdiction of the Commodity Futures Trading Commission, which has regulatory mechanisms. application more flexible than the SEC. (It should be noted, however, that the CFTC also sued Binance in a separate case.)

But it’s a tough case to make when so many digital coins minted over the past decade can’t be used to buy anything other than digital coins. Transferring funds from one coin trading platform to another has become dependent on exchanges like Binance and Coinbase, which also custody their clients’ assets and settle their trades. And marketplaces have marketed themselves to the public primarily as places to invest in digital assets and make a profit on those investments.

The ambiguity has prompted the industry to invest a good portion of its revenue to make sure regulators don’t apply current securities law to it or its products and if that fails, lobby Congress. to change the law to explicitly exclude digital tokens. Coinbase, in particular, has complained strongly that the SEC should bear some of the blame if it finds a problem with the company’s stock. After all, Coinbase lawyers argued in a letter to the SEC last month that the agency cleared Coinbases’ initial public offering in April 2021, which necessitated a thorough review of its finances. And, Coinbase has argued in letters and lawsuits, the uncertainty of the regulatory landscape means it can’t be expected to comply with laws it says don’t apply to its businesses. products.

At the heart of the crypto industry’s lawsuits and pushback is an unanswered question: is a token a security or a commodity?

That lament had little sway over SEC Chairman Gary Gensler, who was sworn in shortly after Coinbases shares began trading on the Nasdaq exchange. Gensler’s approach assumes that, yes, the securities law that already exists applies to the crypto industry, an approach that makes sense to me given the number of coins that apparently exist for the explicit purpose of generate profits for their creators. This has corresponded with a slow but steady ramping up of enforcement actions against assets that the SEC says are being sold illegally, because they are obviously securities. The moves against Binance and Coinbase are poised to put this theory to the ultimate test.

But the crypto industry is not going to collapse without a fight. In an interview on the Bloombergs Odd Lots podcast in March, Coinbase CEO Brian Armstrong indicated that if the SEC were to determine that some of the traded assets are securities, the company would take the matter to court. And with the massive industry war, any litigation is sure to be long and contentious.

Still, it is better to have this argument now rather than later. Coinbase is correct that there are a lot of questions about how much power the SEC actually has over crypto. It would be great if she and the CFTC which claims dominance over cryptocurrencies like bitcoin and ether could come to a consensus on their respective digital strongholds. It would be even better if Congress stepped in and passed legislation to strengthen government oversight and consumer protections against the fraud and profiteering that has gone hand in hand with the rise of speculation in digital coins.

Other than that, I’d rather see the SEC swing for closings in the name of getting the crypto industry under control. This approach is far more preferable than sitting idly by while a technologically advanced form of legalized gambling poses as a great equalizer, bringing the world of finance and the false promise of nearly unlimited profits to the masses.

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