Lawyer's Interpretation: The US SEC Prosecutes Binance and Coinbase's Subsequent Trends

Original author: Daniel Kuhn, Anna Baydakova, Coindesk

Original translation: Wang Eryu, PANews

After years of sensationalizing the cryptocurrency space, SEC Chairman Gary Gensler is finally getting real.

And go straight to Huanglong.

This week, the head of the crypto-skeptical regulator sued Binance and Coinbase. During his tenure, he has repeatedly suggested that PoS (Proof of Stake) tokens are securities, that all cryptocurrency exchanges are illegal businesses, and that all but one cryptocurrency meet the Howey Test (howey test) "investment contract". The Howey test is a standard for determining whether a financial asset is a security.

Taking on the world's largest cryptocurrency exchange (Binance) and largest publicly traded cryptocurrency company (Coinbase), Gensler is likely to come prepared. Coinbase CEO Brian Armstrong said months ago that the SEC was preparing a case and that the exchange would fight back if it filed a lawsuit.

Such a federal enforcement action initiated by Gensler could eventually reach the U.S. Supreme Court. The indictment of Coinbase, which went public days before Gensler's confirmation, has a large number of users in the United States, could spur Congressional action on cryptocurrency regulation. In addition, the broader allegations against Binance, which, if true, would be doomed, could deal a heavy blow to one of the most profitable businesses of the 21st century so far.

These are known unknowns. But the SEC’s combo this week also revealed new information about the agency’s attitude toward cryptocurrencies, and why it’s so aggressive.

CoinDesk reached out to a number of legal authorities and crypto industry watchers to gain insight into where the cases might go and how they might affect the future of the industry. For this uncertain situation, this round table discussion provided a variety of perspectives and viewpoints.

Do the two companies have reason to be optimistic about the lawsuit?

Brian Frye, Attorney: Maybe. I am not optimistic about the SEC's charges against Binance. The accusation is brutal. Binance basically admitted everything the SEC accused. It was a disaster.

I think Coinbase is in a much better position. It has been struggling to comply with the SEC for some time, and the SEC has refused to even offer support for Coinbase’s good-faith efforts to comply. I guess that would be bad for the SEC, and I think at least some courts might object to the charge.

Courts expect institutions to behave in a predictable manner. Coinbase has been asking the SEC what exactly it wants, and the SEC has always refused to respond. That could make Coinbase more of a good guy and the SEC more of a villain.

Also, I don't think the SEC has provided a coherent explanation on a number of issues (or even on any issue), including what it wants to regulate, what it thinks it has the authority to regulate, why it wants to regulate, how it wants to regulate, and what it wants to regulate What goals were achieved and so on.

The SEC has said for years that it dislikes crypto assets of any kind, without giving reasons, or why it thinks they are a problem, and it doesn't even pretend to explain how it would regulate crypto in a way more consistent with its regulatory remit assets.

"As long as the SEC wants to regulate it, it's a security" - Brian Frye

This is a problem. Institutions must be trustworthy, but the SEC has a credibility problem. Its swagger will cause crypto companies a lot of pain in the short term. But it must also consider the longer term.

The SEC has recently been hit by the courts for overreaching when it comes to administrative law judges. I think the court will at least take a hard look at the SEC's regulatory strategy for crypto assets, especially when it comes to some of the companies that have tried to comply but have been shut out by the agency.

Mike Selig, Attorney: The SEC's lawsuit isn't all bad for the crypto industry. While these lawsuits are ongoing, foreign jurisdictions are developing crypto regulations and U.S. lawmakers are discussing structural legislative efforts for the crypto market in Congress. Every time the SEC sues yet another crypto company (especially if the company consistently and publicly states that it tries to comply with applicable laws and regulations), the pressure on U.S. lawmakers to enact proper crypto regulations increases.

These lawsuits will encourage some companies seeking compliance to leave the United States as foreign jurisdictions welcome them with open arms and enact a whole new set of regulations and regulatory norms. Still, the SEC's lawsuits against two of the world's largest cryptocurrency companies offer reason for optimism, as they may prompt Congress to recognize that the SEC's approach to enforcement regulation is not working, and that comprehensive legislation is necessary before the entire Industry will flee to more permissive jurisdictions.

Kristin Smith, Blockchain Association CEO: The SEC's actions this week make clear the way forward: Congress must act now. Last week, House Financial Services Committee Chairman Patrick McHenry and House Agriculture Committee Chairman Glenn Thompson led discussions on digital asset market structure, a step toward effective regulation. As countries around the world move to advance responsible regulation of the cryptocurrency industry, the U.S. must remain competitive.

Will Binance or Coinbase change the way they do business in the short term?

Smith: The SEC doesn't make laws, it makes charges. Enforcement actions represent only the opinion of the regulator, and courts will decide whether its interpretation of the law is accurate. Unless the SEC wins, it may be business as usual.

Did the SEC’s lawsuit against Binance and Coinbase reveal anything new about how the agency views the cryptocurrency industry?

Frye: Either yes or no. I think these lawsuits exemplify exactly what I have long argued but have been disregarded. "Is it a security" is not an ontological question. It's a security as long as the SEC wants to regulate it. So the real question is what does the SEC want to regulate, why does it want to regulate, how can companies comply with the SEC's regulatory goals, and whether those goals are logical.

Selig: To paraphrase a sentence in the American TV series "Battlestar Galactica": "It all happened. It will happen again." The legal rationale for an institution to be required to register in the appropriate category. The lawsuit between Coinbase and Binance is the culmination of various previous incidents. Neither lawsuit provides much new information about how the SEC views cryptocurrencies, but the allegations are worth reading if you want to understand the agency's thinking on cryptocurrencies.

There are also some new elements emerging from the allegations. In its case against Coinbase, for example, the SEC claimed for the first time that it was within the business of brokerages to provide non-custodial digital wallet software that would allow the purchase and sale of so-called securities through third-party decentralized applications, for which the software developers would charge a fee.

In its complaint against Binance, the SEC is based on a new theory that BUSD, a U.S. dollar stablecoin issued by a New York limited purpose trust regulated by the New York State Department of Financial Services, is a security because Binance uses BUSD to generate profits from the sale of BUSD. Holders provide a variety of interest-bearing products. In both lawsuits, the SEC says many crypto assets are securities, but previous lawsuits against issuers or other secondary participants have not considered those assets to be securities.

Longer term: What happens to the crypto industry if the SEC wins and Coinbase/Binance lose in the Supreme Court?

Frye: Good question, it depends on what the purpose of the SEC is. If it wants to destroy cryptocurrencies, it may be able to, with the approval of Congress. Or at least, it can bring cryptocurrencies back to pre-2010 status through regulation. But I don't think that's going to happen. The SEC is a conservative force that doesn't like new things, but it also understands that its job is to regulate the market. I think it will eventually recognize that it has to take its regulatory responsibilities more seriously.

“The SEC hasn’t even tried to promulgate coherent regulations for cryptoassets”

But still, I'm disappointed with the SEC and what it's doing with crypto regulation. I think good and effective regulation can exist. But the SEC hasn’t even attempted to promulgate coherent regulations for cryptoassets. It's just speculation over and over again. This is shameful and these regulators should be ashamed of themselves. The public deserves better regulators. Regulators should really do their jobs, understand the markets they want to regulate, and explain their regulatory decisions. The SEC's complete failure in this regard is simply unacceptable.

Selig: The future of the U.S. cryptocurrency industry is likely to be determined by Congress, not the courts. If the SEC wins its case against Coinbase, Binance, Ripple, etc. (or even makes it all the way to the Supreme Court), we could still see legislation passing Congress that creates a reasonable regulated market structure for crypto assets. Coinbase, Binance, and other crypto ecosystem players will finally have a path to compliance. All major foreign jurisdictions are moving in this direction, and the US is unlikely to remain a maverick.

How would you advise the foundation of the token?

Frye: I would advise them to write down assets and be prepared to pay penalties. Maybe a huge amount.

Selig: Development companies and foundations related to the crypto assets mentioned in the lawsuit may be inclined to intervene and defend the non-securities status of their crypto assets. These entities should carefully weigh the potential pros and cons of doing so with legal counsel. Developers and users on these networks should likewise consult legal counsel regarding their activities, but the SEC’s claim that certain crypto assets are securities is limited in its claims. They have not yet been upheld by judicial rulings on the attributes of securities.

Do you think these cases will change the way Congress approaches cryptocurrency regulation?

Frye: I think it's definitely a watershed moment. Ultimately, Congress will decide what regulators can do. The Biden administration seems to be ignoring all of Gensler's crypto moves, which, to be honest, makes sense since they have bigger things to worry about. But Congress could pass new legislation, at least in theory. It could encourage a Biden administration to appoint a new administrator. It can object to the way the SEC makes decisions.

Selig: The SEC's jurisdictional scramble could see it shoot itself in the foot. Members of Congress have been keen to expand the jurisdiction of the Commodity Futures Trading Commission (CFTC) over crypto assets rather than the SEC, and even want to take away any jurisdiction of the SEC over crypto assets related to decentralized or functional networks. Instead of issuing reasonable norms applicable to the crypto asset industry that would reduce the need for a comprehensive legislative package involving the CFTC, the SEC has chosen to regulate and confront the industry through enforcement. As a result, industry players may favor another market regulator.

Is the current situation likely to lead to a regulation?

Ban most, if not all cryptocurrencies, or impose overly onerous requirements such as registration?

Frye: I doubt it. I think the SEC is more likely to raise the bar for new cryptocurrency launches.

Selig: The current situation is unlikely to lead to laws and regulations that actually ban crypto assets within the United States. Lawmakers and regulators around the world recognize the enormous potential of crypto and are working on a sound legal framework for this asset class. The United States is late, but it will also FOMO in the future. From renewable energy credits to credit default swaps, every new type of investment product goes through a period of regulatory gloom before it becomes a properly regulated and validated asset class. Cryptocurrencies are no exception.

Do you think there is something missing from the public discussion about cryptocurrency laws?

Matt Stoller, Antitrust Activist: Courts or Congress can act at random, but the cryptocurrency hype machine has turned to artificial intelligence, and artificial intelligence is a useful technology. In this case, the only question facing cryptocurrency standard-bearers is, can they provide real use cases beyond money laundering and speculation?

What message do these indictments send to other cryptocurrency exchanges?

If you were an American cryptocurrency exchange, would you be worried?

Frye: Yes. The SEC has made it clear that it is taking action, but that is not what the SEC wants to achieve. This is a problem.

Selig: The message from the SEC Enforcement Division is clear: “We largely agree with SEC Chairman Gensler that most cryptoassets are securities.” The agency now claims that most of the top 10 cryptoassets by market capitalization are securities, but specifically excludes Bitcoin and Ethereum.

However, the law has yet to be finalized and the future will be contested in numerous lawsuits, including against Coinbase and Binance. The agency is expending significant resources challenging Coinbase and Binance. In the short term, the SEC may not initiate too many prosecutions related to encrypted asset exchanges. Cryptoasset exchanges must continue to assess whether each cryptoasset is a security on a case-by-case basis.

There are several allegations against Binance that would have doomed Binance if true, including allegations of wash trading and practices that put customers at risk (some reminiscent of FTX).

Is there any reason to be concerned about future use of this exchange?

Frye: I don't know, maybe?

Could there be a more damaging scenario for the crypto industry than these two lawsuits?

Frye: Everyone in the crypto space is complaining about Gary Gensler. I also object to the way he regulates. But what if the head of the SEC is Lina Khan (the head of the Federal Trade Commission/FTC)? Or more realistically, what if Lina Khan decides that the FTC should regulate crypto products? Good luck, you'll be begging for Gary to come back then.

Smith: Unfortunately, yes, it is clear that Chairman Gensler is blatantly disregarding his agency's mission to protect investors. This week alone, the SEC indirectly declared around $120 billion worth of crypto assets as securities. How can investors be protected by trying to eliminate the market for these tokens?

Will the lawsuit cause one or both of Binance and Coinbase to exit the US?

Frye: Possibly. Based on the content of the lawsuit, I think the possibility of Binance’s exit is real, but the possibility of Coinbase’s exit is very small. Coinbase has done everything it can to comply with the SEC’s rules and expectations, even if the SEC itself behaved improperly.

What do you think of Gary Gensler's statement that the world doesn't need digital currencies?

Why is Gensler making normative claims about the industry instead of focusing on his actual remit?

Smith: Gensler seems to have shown all his cards: he doesn't think digital currencies should exist in the United States. He clearly understands the technology and has enjoyed exploring its potential in the past. He also understands the business of public companies like Coinbase, whose products and services have been approved by the SEC, and he understands the financial disclosure obligations of these companies. So in the absence of more information, observers can only speculate on Chairman Gensler's motivations for his actions