The lawsuits brought by the US securities regulator against crypto exchanges Binance and Coinbase this week mark the most aggressive legal attack on the digital asset market.
The Securities and Exchange Commission charged Binance and Coinbase, two of the largest companies in the industry, with, among other things, violating US securities laws, offering unregistered securities and operating as unregistered platforms. The duo accounts for half of global digital asset trading.
Binance was also accused of mixing billions of dollars in customer money with a separate trading company owned by the CEO and inflating the trading volume of its US platform.
The cases are the agency’s most high-profile enforcement action following repeated warnings from Chairman Gary Gensler that crypto exchanges and the tokens they traded likely violated US federal laws.
After his appointment two years ago, Gensler regularly urged platforms to register with the agency, highlighting that most digital tokens qualify as securities. His language has hardened in recent months following the failure of the FTX crypto exchange last November.
After two major lawsuits in two days, the former Goldman Sachs banker-turned-regulator who had built a reputation in Washington for his tough approach was strident.
“We don’t need more digital currencies,” Gensler told CNBC on Tuesday. “We already have digital currency. It’s called the US dollar. It’s called the euro or it’s called the yen, they’re all digital now.”
Critics are angry with the SEC’s approach, accusing the agency of failing to define the rules for their long-term crypto industry policy and instead regulating the market through enforcement action.
“Regulation through enforcement is not an appropriate way to run a market,” said Glenn Thompson, chairman of the House of Representatives Agriculture Committee at a hearing on the future of digital assets in Washington on Tuesday.
One of the crypto industry’s biggest complaints is a perceived lack of clarity from the US regulator on what counts as a security. With the two lawsuits, the SEC has compiled a list of more than a dozen coins it considers securities, including popular crypto tokens Solana, Cardano, and Polygon.
By naming them, some advocates believe the agency has left the door open to target other crypto trading platforms.
“These are complaints that go to the heart of the crypto exchange business model,” said Peter Fox, a partner at law firm Scoolidge, Peters, Russotti & Fox. “They didn’t choose obscure digital assets that might only be on Binance to make their case, they chose well-known, highly traded assets that are likely to be listed on many exchanges.”
But according to Gensler, the existing rules are clear enough.
“I think there’s been clarity for years,” Gensler told CNBC, adding that investors are protected by securities laws and that “crypto shouldn’t be any different.”
Coinbase chief executive Brian Armstrong said the SEC relied on an “exclusively enforcement approach” that “damaged America” and that “the SEC and (Commodity Futures Trading Commission) have made conflicting statements and disagree on what constitutes a security and what is a commodity”.
He added: “So if we have to use the courts to get clarity, so be it.”
Binance said the SEC’s actions “appear to be part of a hasty effort to claim jurisdiction from other regulators – and investors do not appear to be the SEC’s priority.”
Both exchanges have indicated that they will challenge the SEC’s charges in court. Coinbase has also said it will continue to lobby politicians to pass clearer rules for the crypto market in the US.
Gautam Chhugani, senior analyst of global digital assets at Bernstein, said: “The exchanges will contest this and that dispute can only be resolved by Congress or the judiciary, whichever comes first.”
But since legislative and enforcement cases are likely to drag on for years, some observers expect regulators to file more cases in the meantime.
In recent months, US regulators have begun enforcement actions against crypto companies operating in the country, including Bittrex and Gemini, the crypto venue founded by the Winklevoss twins.
The SEC alleged that Gemini and crypto lender Genesis had a crypto-lending program that was not registered as a securities offering, while the US derivatives regulator CFTC sued Binance in March, accusing it and its CEO Changpeng Zhao of operating illegally in the US. .
“It’s a very clear space squeeze and I don’t think the SEC is likely to stop here,” Berenberg analyst Mark Palmer said of the Coinbase and Binance lawsuits. “I don’t know how any crypto exchange could think other than it could be the next one to be tapped.”
Crypto companies claim that there is no easy path for them to register with the SEC and they are in a precarious position. Gensler on Tuesday compared crypto venues unfavorably to traditional stock markets like the New York Stock Exchange. The latter does not operate a hedge fund or make markets, he said.
He said: “If there is real value in the crypto tokens then compliance will build trust and the business model may change. It is the hard work to gain the trust of the investing public.”
Fox, of law firm Scolidge, said that even if crypto exchanges stripped down their services to resemble a traditional exchange, “they would still have a huge problem because . . . you can only list securities classes that are registered under the exchange law.
“If the (crypto)exchanges were to register as exchanges, they would not be allowed to conduct their business in any form remotely resembling what they do,” he said.
Additional reporting by Scott Chipolina in London