Crypto Crackdown: SEC Cracks Down on Crypto: Should the Industry Be Concerned?

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On Monday, after months of discussions, threats and warnings, the United States Securities and Exchange Commission (SEC) sued Binance, the world’s largest crypto exchange. The next day, the SEC sued Coinbase, alleging misconduct on the part of the Americas’ largest crypto exchange. The SEC’s actions against Binance and Coinbase weren’t entirely unexpected, given the signals (threats, warnings) from the SEC lately. However, what surprised the markets was the SEC’s decision to go after both exchanges simultaneously, which intensified the impact of its actions.

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Binance and its founder, Changpeng Zhao, allegedly violated securities laws by allowing US customers to trade on Binance.com, despite the ban on US-based users, mixing billions of dollars in violation of the regulations. Coinbase has been accused by the SEC of participating in the securities market without proper registration and operating as an unregistered stock exchange, broker, and clearing agency.

An intriguing point is that the SEC did not mention Ethereum (ETH) in its lawsuits against Binance and Coinbase. This omission could be attributed to the fact that the Commodity Futures Trading Commission (CFTC) has already classified ETH as a commodity and not a security. The CFTC’s statement regarding Ethereum’s status may have influenced the SEC’s approach to these particular lawsuits. This demonstrates the complexity and interplay between different regulatory bodies when it comes to determining the classification of cryptos.

The obvious question is whether traders or investors should be concerned. In a word, no. For companies involved in financial and banking services, lawsuits and settlements are common occurrences and are considered normal for the course. Top banks like Bank of America, JPMorgan Chase, BNP Paribas, HSBC and Citigroup have faced substantial penalties for various transgressions amounting to billions of dollars. Bank of America, for example, was penalized $60 billion.

What shall we do now? When faced with regulatory action from the SEC, companies generally have two avenues to choose between settlement or pursuing the matter in court. In a similar case, the SEC filed a lawsuit against Ripple in December 2020, alleging that the sale of its XRP token represented an unregistered securities offering. This case has been before the courts for years with no sign of resolution. Coinbase and Binance have clearly stated that they will fight until the end. This could be a lengthy process, with litigation often spanning several years. How will this affect crypto? Crypto analyst Will Clemente of Reflexivity Research recently pointed out that 86% of all crypto trading volume occurs outside of the United States. This statistic is interesting because it suggests that whatever the regulatory outcome in the United States is unlikely to have an impact on the international adoption of these assets. In fact, if there are severe regulatory measures in the United States, it could actually accelerate the adoption of these assets outside the country. This could lead to more individuals and businesses moving overseas and adopting these assets, recognizing their international nature rather than being limited to US-based assets. The good news is that we will now get an answer to the question of what constitutes security in cryptography. The courts will hear the arguments of both parties and ultimately determine whether these assets are securities or not. This will bring much-needed clarity to the crypto industry.

(Disclaimer: The recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

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