The SEC sued Binance, now Coinbase. What's next for crypto?

Quick Take

  • SEC alleges Binance lied to customers and misdirected capital. The agency is also suing Coinbase for allegedly violating securities laws.
  • “Charges have the potential to reshape the regulatory landscape for digital assets,” said Moody’s head of digital assets strategy.
  • Rival exchange Coinbase’s shares and the price of bitcoin all declined amid the news.

Before deleting the post, Binance CEO Changpeng Zhao took to Twitter to call the Securities and Exchange Commission lawsuit targeting him and his exchange “a preview of what's next."

In its lawsuit, the SEC alleges Binance lied to customers and misdirected capital to separate investment funds owned by Zhao. If the regulatory agency’s suit is successful, Zhao and Binance could be barred from doing business in the U.S.

Given Binance's size as the world's biggest exchange, the outcome of the suit could have an enormous impact on massive on the future of the industry.

"These charges have the potential to reshape the regulatory landscape for digital assets, particularly in combination with Congress’ ongoing efforts to shape digital finance policy,” said Rajeev Bamra, head of digital assets strategy at Moody’s Investors Service. Bamra also said the SEC’s action could put “pressure on the crypto-finance ecosystem to adapt their practices accordingly.”

In general, the U.S. has been having a bit of a come-to-Jesus moment ever since FTX collapsed late last year and it was revealed that the once-celebrated crypto trading platform had not only mishandled billions of dollars but lost millions of customers’ funds, including many Americans. Since then, regulators have stepped up efforts to regulate other platforms including U.S.-based Coinbase and the Cayman Islands-registered Binance.

“The SEC’s allegations align with similar charges brought forth by the CFTC and Department of Justice, indicating a collective effort to address issues such as evading U.S. regulations, offering unregistered crypto assets, and potential money laundering violations,” said Bamra.

More "complex lawsuits" to come?

Avivah Litan, a senior blockchain industry analyst at Gartner, said the Binance suit could signal the SEC is moving on to more complicated crypto-related cases. “It proves that the SEC tackled the easy cases first — like suing celebrities for advertising tokens — and in the background has been preparing more involved, difficult cases that will have a much more significant impact on curtailing reckless behavior by cryptocurrency exchange operators,” she said. “We may see more of these complex lawsuits in the future.”

The day after the SEC announced its Binance lawsuit it said it was also suing Coinbase.

Concerned the SEC might intensify efforts to rein in Coinbase’s activity, Berenberg Capital Markets’ analyst Mark Palmer said, previous to the SEC lawsuit announced on Tuesday, that he was advising investors to proceed carefully when it comes to the U.S.-based exchange's shares, which trade on the Nasdaq.

“Our cautious stance toward Coinbase … is largely based on our belief that it is likely that the SEC will bring an enforcement action against the company soon.” Coinbase shares were down by as much as 12% after the Binance news hit.

Coinbase's troubles with the SEC have history. Last year the exchange ran by CEO Brian Armstrong petitioned the SEC to create new rules tailored to digital assets. In April, already under a publicly-acknowledged investigation by the agency, Coinbase took a gamble and filed a lawsuit against the SEC, hoping to force the regulator to respond to its petition.

Coinbase CEO Brian Armstrong and Chief Legal Officer Paul Grewal responded to the SEC in a video.

Though the SEC has called most digital assets securities since a 2017 report on the original Decentralized Autonomous Organization, much of the crypto industry argues that securities disclosures should not apply to tokens.

"It would be best if the SEC and other government agencies proactively created rules and regulations that clarify the boundaries for cryptocurrency commerce in the United States,” said Litan, adding that the approach of U.S. regulators has so far been reactive. She argued that the US has a tendency to enforce after the fact, when a more-tailored regulatory framework could prevent companies from leaving the U.S.

Arca Trader Kyle Doane echoed those sentiments. “Regulators will need to provide guardrails for dealing with securities in the U.S. and give participants the ability to abide by such regulations instead of straight to litigation,” he said.

After news of the Coinbase lawsuit broke on Tuesday, the exchange's chief legal officer Paul Grewal said in a statement that the SEC's enforcement strategy is "hurting America’s economic competitiveness."

Some are still hopeful that crypto-related innovation in the US can still prosper.

“There’s still lots of great developers in the U.S. and that won’t change anytime soon,” said Laura Vidiella, a vice president at crypto investment firm LedgerPrime who doesn’t believe elements included in the action against Binance will push companies away from wanting to do business in the U.S. “However, it will push some financial institutions, or some of their desks away from trading in the US, because of the lack of regulatory framework. We’ve all learned about new digital assets that are now securities today,” she said.

Tokens and avoiding 'dystopia'

In its Binance complaint, the SEC also took the opportunity to state it considers 12 tokens to be securities. Among the dozen tokens named were solana, cardano and polygon. The SEC also mentioned tokens in its Coinbase lawsuit, including chiliz and flow, the blockchain associated with the high-profile NFT brand NBA Top Shot.

While broadly viewed as negative news across the crypto sphere — the price of cryptocurrencies including bitcoin fell amid the news — IOHK co-founder and CEO Charles Hoskinson appeared to wax optimistically that perhaps the “event” could galvanize crypto advocates and spur greater unity.

“It does seem like this event is a perfect opportunity for the entire industry to set aside its fragmented nature and unite for a common sense set of rules and guidelines that can prevent the United States from slipping into a dystopia,” Hoskinson posted to Twitter, where has nearly 1 million followers.

“This event seems to be a political, philosophical disagreement with the very existence of cryptocurrencies and what they represent,” Hoskinson also wrote. “An unelected group of people have decided that concepts like self-sovereign identity, owning your wallet, and the freedom to control your economic agency should be removed from the masses and given to the 'enlightened' few.”

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