SEC has launched a comprehensive political battle over cryptocurrency.

SEC is fighting against cryptocurrency.

Article author: Michael J. Casey Article translation: Block unicorn

Michael Casey says that the SEC’s lawsuits against Binance and Coinbase could last for years within the US legal and political system.

The SEC’s lawsuits against Binance and Coinbase this week have set up a high-risk battle that will draw in three branches of the US government to decide whether the cryptocurrency industry will permanently leave the US and define the future of digital currencies.

The SEC’s aggressive action against Binance, the world’s largest cryptocurrency exchange, and Coinbase, America’s largest, demonstrates the agency’s extraordinary discretion. In interviews following the announcement, SEC Chairman Gary Gensler said “we don’t need more cryptocurrencies,” which seems to suggest that he really wants to destroy the cryptocurrency industry.

By using all legal means against Binance, a thoroughly international company, and its high-profile CEO, Changpeng Zhao (aka “CZ”), the SEC is attempting to prove that its jurisdiction extends beyond US borders. The SEC’s claims in the lawsuit against Binance include providing unregistered securities and commingling customer funds.

In Coinbase’s case, the SEC is clearly targeting more than just the defendant. The case is based on the notion that most securities traded on the San Francisco-based exchange are unregistered securities, which poses legal problems for Algorand, Polygon, Solana, and others. These actions directly strike at the centralized finance (CeFi) systems that Binance and Coinbase’s custodial models are based on, and indirectly impact some of the major protocols that decentralized finance (DeFi) relies on.

However, this is far from easy for the SEC. First, these cases could take years to decide or resolve – if the SEC’s three-year lawsuit against Ripple Labs is any indication. Both Coinbase and Binance have vowed to fight hard in court, which will put pressure on the SEC’s enforcement team, which is already stretched thin, with a huge workload.

Moreover, the SEC’s hardline stance has not received widespread support in other areas of the US government. The timing of these actions is such that the agency is almost inviting other centers of power to come after it.

Other branches of government, other viewpoints

First, let’s look at Congress. A bill soon to be introduced in the House sets parameters for how digital assets should be classified and limits the SEC’s interpretive power over cryptocurrencies under existing securities law, thus restricting its ability to initiate such enforcement actions. The bill is jointly proposed by Patrick McHenry (Blockingtrick McHenry), Chairman of the House Financial Services Committee, who is critical of Gensler’s tough action on the cryptocurrency industry, and Glenn Thompson, Chairman of the Agricultural Committee and head of the Commodity Futures Trading Commission (CFTC), another important agency competing for greater regulatory power over cryptocurrencies.

It is doubtful that the McHenry-Thompson bill can become law during the current term of office, given the Democratic-controlled Senate, but the proposed legislation has become an important issue in the election season, accelerating its pace.

This leads to the second branch of government: administrative agencies, including the SEC and other such agencies under its jurisdiction. These lawsuits will fall into a presidential campaign in which the future of cryptocurrencies and digital assets will become part of public debate like never before.

Already, support for cryptocurrencies has come from three people with presidential aspirations: Robert F. Kennedy Jr., who is challenging the Democratic nomination of Biden; Florida Governor Ron De Santis, seen as a major challenger to former President and third-time candidate Donald Trump; and Vivek Ramaswamy, a biotech entrepreneur and another Republican contender. So far, the Republican frontrunner, Trump himself, has used non-fungible tokens as a fundraising tool, although his statements on cryptocurrencies have been all over the map. (Of course, he was federally charged on Thursday night with serious issues that make his candidacy murkier.)

Whether Biden continues to be president or not, this level of attention to the industry will help shape the political attitude of the future SEC in handling these cases.

Next up is the Supreme Court, which last month cut the power of the Environmental Protection Agency (EPA) to enforce provisions against landowners under the Clean Water Act. What does this have to do with the SEC and cryptocurrency? Well, the conservative majority now controlling the court sees EBlocking as just the first regulatory agency that needs to have its power curtailed. A larger-scale attack on administrative agencies is coming, and the SEC could be a target.

In other words, a perfect political storm is brewing that makes the outcome of the current war on cryptocurrency difficult to predict.

What happens next?

The multiplicity of fronts in this battle also raises the risk of the outcome, which could be years away even if we need to wait to see it.

If Gensler’s (SEC Chair) strategy of an all-out attack prevails, it could be the death knell for cryptocurrencies in the US. Developers would flee en masse to jurisdictions like Dubai, Bermuda, Singapore, France, or many others that are actively setting regulatory boundaries for cryptocurrency innovation.

This is not to say that some bank-licensed stablecoin idea or real-asset tokenization strategy led by existing, regulated institutions and public companies won’t be allowed in the US. But because these may be difficult to mesh with the banned “crypto” blockchains’ permissionless architectures, the outdated US capital markets may struggle to compete with the new models of programmable money and decentralized governance being nurtured elsewhere.

But it won’t be easy for the SEC, instead, over time and with increasingly strong pushback from cryptocurrency supporters in Congress and the courts, this wave of attacks may subside. But what is the objective? If such a victory only further politicizes and partisanizes the issue, then the bigger, more important battle – mainstream acceptance and adoption – still needs to be fought.

What we need – for all of our sakes – is for the cryptocurrency conversation to move beyond politics. Ideally, this will happen naturally because, after all, it’s a technology – it should be non-political. But sadly, it will depend on the efforts of the cryptocurrency community. Focus should be on education, showcasing real-world use cases, and highlighting the benefits this industry brings to humanity in terms of decentralized value exchange and data sharing.

We must try to ignore the drama in Washington, not to disengage from the political process, but to find ways to participate that can attract both sides.

Part of that is focusing on positive narratives. There is no doubt that in an era of great uncertainty around climate, geopolitical tension, and the encroachment of artificial intelligence on society, such stories will have a market, regardless of which side of the political aisle they come from.

We will continue to update Blocking; if you have any questions or suggestions, please contact us!

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