Reviews | There may not be a legal US crypto exchange

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Can anyone run a cryptocurrency exchange in the United States? I don’t mean run one well, just run one at all. Last week, the Securities and Exchange Commission filed suit against two major crypto exchanges, Binance and Coinbase. The latter, in particular, deserves special attention, because if Coinbase can’t operate a legal crypto exchange in the US and the SEC pretty much suggests it can’t, it’s hard to imagine anyone. another can do it either.

After all, Coinbase, the largest US-based crypto exchange, is the best in its industry. Of course, this Boy Scout has somewhat ominously chosen to hang out behind the gym with the weed dealers and the kid who just got bailed after stealing the principal’s car. But Coinbase itself doesn’t cause much trouble.

While Sam Bankman-Fried and his FTX cronies found ever more flamboyant ways to make billions disappear, Coinbase seems to have been boringly using customer funds to buy crypto and keep it for them in the electronic equivalent of cryptocurrency. a locked safe. The company’s financial statements are audited by Deloitte, not by a recent graduate of Uncle Mannys’ school of accounting and HVAC repair. She even had permission from the SEC, since April 2021, to list her shares on Nasdaq.

Just not so fast, says the SEC. Last Tuesday, the commission filed a lawsuit against Coinbase, alleging that the company was doing well, in fact, pretty much what it told the SEC it was going to do when it sought permission to list its shares. But now the SEC says it amounts to operating an illegal stock exchange. Which raises a few questions.

Follow the opinions of this author Megan McArdle

For example, if Coinbases’ activities are illegal, why did the SEC allow the company to list its shares?

And if Coinbases operations are illegal, then is it even possible to have a legal crypto exchange in the United States?

To answer the second question first: no, probably not, at least not the way cryptocurrency exchanges normally operate, i.e. storing and exchanging crypto for customers. Stock exchanges cannot hold securities; all they can do is help customers redeem them.

If the courts side with the SEC, then maybe Coinbase could survive by splitting the storage and trading functions into two separate businesses, or maybe just trading bitcoin and ether, which don’t seem like not meet the SEC’s definition of a security. But it’s not clear if this is a viable business model, or if the SEC is actually interested in finding a way for crypto exchanges to operate legally. Which brings us to the other question I asked: Why now?

It’s true that the SEC never technically declared Coinbases’ operations to be legal when it let the company go public. But it’s a weird argument to say, just because you let yourself be a public company, don’t think you’re saying your company is legal. If the Sinaloa cartel tried to list on the New York Stock Exchange, would the SEC let it as long as auditing and disclosure requirements were met?

Probably not. So what gives?

Well, even if you think crypto trading is illegal, it’s not quite the same type of illegality as selling fentanyl on the street. Congress deliberately outlawed drug trafficking, when crypto was simply not contemplated by our venerable securities laws. It’s not crazy that in 2021 the SEC is willing to take a wait-and-see approach to regulating a new financial product.

A few days after Coinbase began trading, however, a new SEC chairman arrived, less crypto-friendly, in part because the folks gathered behind the gym turned out to be even more disreputable than authorities suspected. . There was the theatrical implosion of FTX, and there were many small incidents. According to one estimate, at least $4.3 billion was lost between January and November last year to crypto hacks and outright fraud, up about a third from the year former.

But there seems to be a lot of scams out there, that’s an argument for better regulation, not making crypto untradable. A bigger problem is that, since 2021, it has become clearer that crypto does not offer real advantages to compensate for its disadvantages.

Certainly, in countries plagued by hyperinflation, crypto could offer real value by providing a stable medium of exchange. But the United States prints the world’s reserve currency. Only a slim minority of Americans have ever used or traded cryptos, and these people mostly seem to have used them as a form of financial speculation. This means that the best you can hope for, even from a well-run US-based crypto exchange, is basically an honest casino. Unfortunately for Coinbase, the SEC doesn’t like to think of itself as a high-priced version of the Nevada Gaming Control Board. He wants to believe that the bets he oversees generate greater economic value.

There is always the possibility that crypto can do this, maybe AI robots will use crypto to transact? But crypto enthusiasts can’t block regulators forever by coming up with something else that might be good for someday. Eventually, they have to deliver here and now.

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