SEC Sues Coinbase and Binance
The proverbial 💩hit the fan in the Crypto sector last week as the SEC sued both Coinbase and Binance. The main argument in these cases is that both are operating illegal trading operations since the SEC believes most Cryptocurrencies are unregistered securities, even though they only named a handful of specific tokens in the lawsuits. The SEC also believes that staking programs are illegal and is looking to shut these down too. With respect to Binance, the SEC added a host of serious allegations against the firm and its leader Changpeng “CZ” Zhao including commingling of customer funds and inflating reported trading volumes.
⚖️These charges by the SEC led to the markets banging Crypto prices lower, with $BTC down about 5% and many other tokens like Solana down as much as 20%. Coinbase was hit with cease and desist orders on its staking program by a group of 11 U.S. states. The SEC asked a U.S. court to freeze access to Binance US assets globally. Binance US halted USD fiat withdrawals starting in a few days, and Robinhood is delisting several Crypto tokens listed in the SEC lawsuits.
🥊It might sound crazy, but I am really happy things are playing out in this manner. Coinbase is the largest U.S. Crypto company, and Binance is the biggest player in the world. These two groups have the resources to fight the SEC, and they have made it clear that they will fight. Coinbase’s chief legal officer Paul Grewal said, “we will continue to operate our business as usual”. I generally think Coinbase is the cleanest player in the Crypto community, and they have been working for years to try and get the SEC to work with them to provide a path to registration. This will serve Coinbase well in court, as judges tend to look at actions and intent in cases like these.
đź“ťAdditionally, the aggressive legal action by the SEC might be enough to finally get Congress to act on comprehensive legislation for the industry. This is definitely the outcome that needs to happen. The SEC should not be regulating by enforcement activities. Just a few days ago, Reps. Patrick McHenry, R-N.C., and Glenn Thompson, R-Pa. introduced a bill that would provide much needed clarity. This proposed bill sets the CFTC to regulate most of the industry and deemphasizes the purview of the SEC. The Crypto markets like this bill, but most people acknowledge it is still a long way from being finalized to law.
🔮What does this mean for the short term? Things are going to be bad for Crypto and web3. It’s hard to envision anyone serious issuing a new token with all this uncertainty. There really is no path to a clean regulatory bill of health with SEC Chair Gensler saying last week that “we don’t need more digital currency”. Banks will continue to be negative on companies active in the Crypto markets. It was already hard to open a bank account if you’re in web3, but it will be worse now. I’m not even sure what the SEC thinks of NFTs. The “T” stands for “token”, so maybe the SEC thinks all these are unregistered securities too. Raising money for a web3 startup right now will be extremely difficult.
🏗️The markets will have to wait for the courts or Congress to progress before things begin to return to something more normal. However, when the clarity eventually comes, I am still confident (or maybe hopeful) that we will have a set of rules that allows Crypto and web3 to flourish. These are important new technologies, and it would be a big miss for the United States to lose out on these markets. This is the time to build so that companies are ready to move fast when the regulatory environment brings us back open for business.
I’ll continue to monitor the regulatory environment and will expand my comments as new information becomes available.
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