Experts Interpret What Will Happen Next with Binance and Coinbase

Experts analyze future of Binance and Coinbase

Author: condesk Translation: BlockingBitpushNews Mary Liu

The US Securities and Exchange Commission (SEC) has come down hard on Binance and Coinbase, and Coinbase’s lawsuit, which has tens of thousands of US users, could spur Congress to take action on cryptocurrency regulation. The more serious charges against Binance could bring down one of the most profitable companies of the 21st century. Can the SEC win? Will Binance be shut down in the US? What will Congress do? As the SEC takes action against the biggest player in the crypto industry, Coindesk interviewed legal firms and crypto industry veterans to better understand the direction of the cases and what they mean for the future of the industry.

Do the companies have reason to be optimistic about these lawsuits?

Lawyer Brian Frye: Maybe. I’m not optimistic about the SEC’s charges against Binance. It’s brutal. Binance has basically conceded everything the SEC has alleged. It’s a disaster.

I think Coinbase’s position is much better. It has been trying to comply with SEC regulations for a while, and the SEC even refused to participate in Coinbase’s good-faith efforts to comply, which doesn’t look good, and I think at least some courts might push back on that. Courts expect institutions to act in predictable ways. Coinbase has been asking the SEC what it wants, and the SEC has been refusing to respond. That might make Coinbase look like the good guy and the SEC look like the bad guy.

Also, I think the SEC still hasn’t provided a coherent explanation of what it wants to regulate, what it thinks it has the authority to regulate, why it wants to regulate, and how it wants to regulate. If the US Securities and Exchange Commission wants regulatory power, it’s a security.

Another issue is that institutions have to be credible, and the SEC has a credibility problem. It’s regulating through enforcement, which is causing a lot of pain for crypto companies in the short term, and it has to think about longer-term issues.

The SEC recently took a beating from the courts for overreaching in ALJ [Administrative Law Judge] proceedings. If the courts take a serious look at its handling of crypto assets, I wouldn’t be surprised, especially for companies that are trying to comply but are being denied by the agency.

Lawyer Mike Selig: Lawsuits aren’t entirely bad for the crypto industry. In the context of these lawsuits, foreign jurisdictions are adopting crypto laws and regulations, and US lawmakers are debating crypto market structure legislation in Congress. Every time the SEC sues another crypto business, political pressure for wise crypto legislation increases – especially if the company has been publicly stating that it’s been trying to comply with applicable laws and regulations.

These lawsuits encourage companies seeking compliance with clear applicable rules to leave the United States, as foreign jurisdictions welcome them with open arms and formulate a new set of laws and regulations. However, there is reason to be optimistic about lawsuits brought by the SEC, as they can prompt Congress to recognize that the SEC’s enforcement approach is not working and requires comprehensive legislation – otherwise, the industry will flee to more lenient jurisdictions.

Kristin Smith, CEO of the Blockchain Association: This week’s SEC action has clarified the way forward – and it is urgent: Congress must act. Last week, House Financial Services Committee Chairman Blockingtrick McHenry and House Agriculture Committee Chairman Glenn Thompson introduced a draft discussion of the structure of the digital asset market, a step towards effective regulation. As responsible regulation of cryptocurrencies is being implemented around the world, it is essential that the United States remain competitive.

In the short term, will Binance or Coinbase change their operations?

Kristin Smith: The SEC does not make laws – it only makes allegations. Enforcement actions are just the opinions of regulators – the courts will decide whether their interpretation of the law is correct. Everything will continue as usual unless the SEC wins.

Does the SEC’s lawsuit against Binance and Coinbase mean that the agency will have a new definition for cryptocurrencies?

Lawyer Brian Frye: Yes and no. I think these lawsuits illustrate what I’ve been saying for a long time, but people just don’t want to listen. “Is it a security?” This is not an ontological question. If the SEC wants to regulate it, it’s a security. So the real question is what the SEC wants to regulate, why it wants to regulate those things, how companies can comply with the SEC’s regulatory goals, and whether any of them make sense.

Lawyer Mike Selig: To quote Battlestar Galactica, “All this has happened before, and all this will happen again.” For years, the SEC has been gradually building legal theories about appropriate registration categories for crypto asset securities and various crypto asset intermediaries. The Coinbase and Binance lawsuits are the culmination of all previous events. Neither of these cases provides a lot of new information about how the SEC views cryptocurrencies, but if you want to know how the agency views cryptocurrencies, these complaints are worth reading.

These complaints have some novel aspects. For Coinbase, the SEC first asserts that offering non-custodial digital wallet software is a broker-dealer activity because the wallet can be used to buy and sell so-called securities on third-party decentralized applications, with the software developer taking a fee.

In the Binance case, the SEC asserts that BUSD is a USD stablecoin issued by a New York limited purpose trust company regulated by the New York State Department of Financial Services and is a security under a new theory—that Binance uses profits from the sale of BUSD to provide various yield-bearing programs for BUSD holders. In both of these complaints, the U.S. Securities and Exchange Commission argues that many cryptocurrencies are securities, a characterization it had not previously applied to issuers or other secondary actors.

In the long-term: what would happen to crypto if the SEC wins and Coinbase/Binance lose at the Supreme Court?

Frye: Good question, it depends on what the SEC wants to achieve. If it wants to destroy cryptocurrency, it could do so, if Congress allowed it. Or at least, it could roll cryptocurrency regulation back to the late 2000s. But I don’t think this will happen. The SEC is conservative, it doesn’t like novel things, but it also recognizes that its duty is to regulate the market. I think it will eventually realize that it has to take its regulatory role more seriously.

But also, I am disappointed with the SEC and its response to cryptocurrency regulation. I think regulation can be good and effective, but the SEC didn’t even attempt to issue coherent regulations for cryptocurrencies, it just repeated talking points, which is embarrassing, regulators should do some soul-searching, the public deserves better. Regulators should really do some actual work, fully understand the markets they intend to regulate, and explain why they are regulating. The SEC has completely failed in this regard, which is unacceptable.

Selig: The future of American cryptocurrency may ultimately be decided by Congress rather than the courts. If the SEC prevails in its litigation against Coinbase, Binance, Ripple, and other companies (even all the way to the Supreme Court), we could still see legislation establishing reasonable regulatory market structures for crypto assets pass in Congress. Coinbase, Binance, and other ecosystem participants will eventually have a compliance path. Every major foreign jurisdiction is moving in this direction, and the United States is unlikely to remain the sole holdout.

If you have ever or are currently appointed as lead counsel for any token that is alleged to be the primary representative of a security in any litigation, how would you advise?

Frye: I would advise them to liquidate their assets and expect to pay a fine, which could be a not insignificant number.

Selig: Development companies and foundations related to any cryptographic assets mentioned in litigation may be inclined to intervene to defend the non-security nature of cryptographic assets. These entities should carefully consider the potential risks and benefits of doing so with legal counsel. Developers and users on these networks should also consult legal counsel about their business activities, but the SEC’s conclusion that certain cryptographic assets are securities is arbitrary and has not been supported by judicial rulings on the definition of securities.

Will these cases change the way Congress deals with cryptocurrency regulation?

Frye: I think it’s absolutely a watershed moment. Ultimately, Congress decides what agencies can do. Congress can, in theory, do so through new legislation. It can encourage the Biden administration to appoint new officials, and it can oppose the SEC’s decision-making process.

Selig: The SEC’s jurisdictional usurpation may backfire. Members of Congress have been eager to expand the Commodity Futures Trading Commission (CFTC) rather than the SEC’s jurisdiction over cryptographic assets, even contractually with any cryptographic assets related to decentralized or functional networks within the SEC’s range of power. The SEC has not issued wise rules applicable to the cryptographic asset industry, reducing the need for comprehensive legislative solutions involving the CFTC, but rather regulates through enforcement and infuriates the industry. Therefore, industry participants may favor other market regulators.

Is it possible that the current situation could result in most (if not all) cryptocurrencies being banned, or subject to restrictions that prohibit their registration and other requirements?

Frye: Yes, but I am skeptical. I think the SEC is more likely to make it harder to introduce new cryptocurrencies.

Selig: The current situation is unlikely to result in laws or regulations that effectively ban cryptographic assets within the United States. Legislators and regulators worldwide recognize the enormous potential of cryptographic technology and are developing reasonable legal frameworks for asset classes. The United States is late, but FOMO will also join. Every new investment product from renewable energy credits to credit default swaps goes through a period of regulatory haze before becoming an asset class subject to proper regulation and verification. Cryptography is no exception.

What was missing from the public discussion about encryption?

Antitrust activist Matt Stoller: While courts or Congress can do whatever they want, the hype machine around cryptocurrency has moved to artificial intelligence, which—while it has plenty of hype associated with it—is a useful technology. So, the only question for cryptocurrency advocates is whether they can provide use cases beyond money laundering and speculation?

What message did the lawsuits send to other cryptocurrency exchanges? Should US cryptocurrency exchanges be worried?

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

Selig: The message from the SEC’s enforcement arm is clear: “We generally agree with SEC Chairman Gensler’s view that most crypto assets are securities.” The agency now asserts that most of the top ten crypto assets by market cap are securities, particularly excluding bitcoin and ether, and the fact bears this out.

However, the law is not settled, and other lawsuits, including the Coinbase and Binance cases, will be filed. I would be surprised if we see more cases related to crypto asset trading brought by the SEC in the short term. Cryptocurrency exchanges must continue to assess whether each cryptocurrency is a security based on the unique facts and circumstances associated with each cryptocurrency.

There are several charges against Binance that, if true, are almost fatal, including charges of fake trades and practices that put clients at risk (some of which are reminiscent of FTX). Is there reason to worry about the future of centralized exchanges?

Frye: I don’t know, but maybe?

Is there a worse SEC chairman than Gary Gensler? (Subtext: What could be more destructive for the industry than these two major lawsuits?)

Frye: Everyone in the cryptocurrency field complains about Gary Gensler. I criticize his regulatory approach as well. But what if the head of the SEC was Lina Khan—the head of the Federal Trade Commission (FTC)? Or, more realistically, what if Lina Khan decided that the FTC should regulate crypto products? I can only wish you good luck.

Smith: No, unfortunately, it is clear that Chairman Gensler has blatantly disregarded his agency’s mission to protect investors. Is trying to eliminate these tokens protecting investors, when just this week the SEC has indirectly classified crypto assets worth approximately $120 billion as securities?

Is it possible that the lawsuit could lead to Binance and/or Coinbase being shut down in the United States?

Frye: Yes. Based on the complaint, I think that’s a very real possibility for Binance, but less so for Coinbase which has done its best to comply with SEC rules and expectations.

What do you think of Gary Gensler’s statement that the world doesn’t need cryptocurrencies because the dollar, euro, and yen are all digital currencies? Why is Gensler making this statement instead of focusing on his actual duties?

Smith: Gensler seems to have now shown his hand: he believes that digital currencies should not exist in the United States. He is well-versed in this technology and has been happy to explore its potential in the past. He also understands the business of publicly traded companies like Coinbase, the products and services that the SEC has already approved, and their financial disclosure obligations. So, without more information, it is unclear what Gensler’s motivations are.

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