US lawyers discuss the future of the SEC’s case against Binance and Coinbase: the outcome may be very different

US lawyers discuss the future of the SEC's case against Binance and Coinbase, noting that the outcome may vary significantly.

Translation | Wu Shuo on Blockchain

Original Article | CoinDesk

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https://www.coindesk.com/consensus-magazine/2023/06/09/binance-and-coinbase-experts-weigh-whats-coming-next/?utm_content=editorial&utm_source=twitter&utm_medium=social&utm_campaign=coindesk_main&utm_term=organic

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Gary Gensler, the crypto-skeptical regulator who has suggested during his tenure that tokens can be securities, that all crypto exchanges are illegal, and that all cryptocurrencies except one are investment contracts subject to the Howey test for determining whether a financial asset is a security, has filed lawsuits against Binance and Coinbase this week.

Facing off against the world’s largest crypto exchange (Binance) and the largest publicly listed crypto company (Coinbase), Gensler is likely to face a battle. Coinbase CEO Brian Armstrong said a few months ago that the SEC was preparing its case and that the exchange would fight back if sued.

Gensler’s behavior is a federal law enforcement action that is likely to end up in the Supreme Court. The Coinbase case could prompt Congress to take action on crypto regulation. The broader charges against Binance, if true, could disrupt one of the most profitable businesses of the 21st century.

These are the known unknowns. But this week’s SEC barrage also revealed the agency’s approach to crypto and why it’s taking such aggressive new steps.

CoinDesk contacted legal experts and crypto observers to get a better understanding of what might happen next, and what these cases could mean for the industry’s future. The resulting roundtable discussion provided multiple perspectives on an uncertain situation.

Is there reason for companies to be optimistic about these lawsuits?

Attorney Brian Frye : Perhaps. I’m not very optimistic about the SEC’s charges against Binance. The accusations are severe, and Binance essentially admits to all of them. It’s a disaster.

I think Coinbase’s situation is much better. It has been trying to comply with SEC rules for a long time, but the SEC has refused to engage with Coinbase’s compliance efforts. I don’t think this is a good sign, and I think some courts might be wary of it.

Courts expect institutions to act in a predictable way. Coinbase has been asking the SEC what it wants, and the SEC has been refusing to respond. This could make Coinbase look like the good actor and the SEC look like the bad actor.

Additionally, I don’t think the SEC has provided even a slightly clear explanation about what it wants to regulate, what it thinks it has the authority to regulate, why it wants to regulate, how it wants to regulate, what it hopes to achieve with its regulation, or really anything else.

“If the SEC wants to regulate it, it’s a security.” – Brian Frye

The SEC has spent years saying it doesn’t like any kind of crypto asset, but it hasn’t explained why it doesn’t like them, hasn’t explained why it thinks they’re a problem, hasn’t even pretended to explain how it would regulate crypto assets in a way that it thinks is consistent with its regulatory responsibilities.

This is an important issue. Institutions need credibility, and the SEC has a credibility problem. It is flexing its muscles and causing a lot of trouble for crypto companies in the short term. But it also needs to think long term.

Recently, the SEC has been harshly criticized by the courts for overstepping its authority in administrative law judge (ALJ) matters. I wouldn’t be surprised if the courts at least take a close look at its actions in the crypto asset space, especially with regard to companies that are trying to comply but are being refused by the agency.

Mike Selig, attorney: The SEC’s lawsuits are not entirely negative for cryptocurrencies. Against the backdrop of these lawsuits, foreign jurisdictions are adopting cryptocurrency laws and regulations, and US legislators are discussing cryptocurrency market structure legislation on Capitol Hill. Whenever the SEC sues another cryptocurrency company, especially if the company publicly states that it is trying to comply with relevant laws and regulations, it puts political pressure on US legislators to pass reasonable cryptocurrency legislation.

These lawsuits encourage businesses to seek compliance with clear applicable rules to leave the United States because foreign jurisdictions welcome them and provide a new set of laws and regulations. However, there is reason to be optimistic about the recent SEC lawsuits against the world’s two largest cryptocurrency companies because they can prompt Congress to recognize that the SEC’s method of regulation through enforcement is not working and comprehensive legislation is needed—otherwise the industry will flee to more lenient jurisdictions.

Kristin Smith, Blockchain Association CEO: This week’s SEC action makes the path forward clear and urgent: Congress must act. The Digital Asset Market Structure Discussion Draft introduced last week by House Financial Services Committee Ranking Member McHenry and House Agriculture Committee Ranking Member Glenn Thompson is a step toward effective regulation. As responsible regulation for cryptocurrency is adopted around the world, it’s critical that the US remain competitive.

In the short term, do you expect Binance or Coinbase to change their business practices?

Smith: The SEC does not make laws, it just brings charges. The enforcement action is just the regulator’s opinion, and the court will decide whether its interpretation of the law is correct. Unless the SEC wins, business may continue as usual.

Does the SEC’s lawsuit against Binance and Coinbase reveal new thinking by the agency on cryptocurrency?

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 hear it. “Is it a security?” isn’t a fundamental question. If the SEC wants to regulate it, it’s a security. So, the real questions are what does the SEC want to regulate, why does it want to regulate these things, how do companies fit into the SEC’s regulatory goals, and does any of this make sense.

Selig: To quote Battlestar Galactica, “All of this has happened before. All of this will happen again.” SEC has been building a legal theory about the securities status of crypto assets and appropriate registration categories for various crypto asset intermediaries for years. The Coinbase and Binance lawsuits are the culmination of all that came before. Neither case provides a wealth of new information about how the SEC views cryptocurrency, but if you want to understand the agency’s perspective on cryptocurrency, then these complaints are worth a read.

Speaking of which, there are some novel aspects to these complaints. For Coinbase, the SEC, for the first time, asserts that providing non-custodial digital wallet software constitutes broker-dealer activity because the wallet can purchase and sell so-called securities through third-party decentralized applications, and the software developer receives a fee for that.

In the Binance case, the SEC asserts that BUSD is a US dollar 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 the new theory – that Binance provides various profit-sharing plans for BUSD holders using the sales proceeds of BUSD. In both complaints, the US Securities and Exchange Commission argues that many cryptocurrencies are securities, a characterization it did not previously apply to these assets in litigation against issuers or other secondary participants.

In the long run: what would cryptocurrency look like if the SEC wins and Coinbase/Binance loses at the Supreme Court?

Frye: Good question, it depends on what the SEC wants to accomplish. If it wants to destroy cryptocurrency, it could probably do so as long as Congress allows it. Or at least it could roll back cryptocurrency regulation to the early 2000s. But I don’t think that will happen. The SEC is conservative and doesn’t like novel things, but it also realizes that it is regulating a market. I think it will ultimately realize that it has to take its regulatory responsibilities more seriously.

But at the same time, I am disappointed with the SEC and its response to cryptocurrency regulation. I think regulation can be done well and effectively. But the SEC hasn’t even tried to create coherent regulatory rules for cryptocurrency assets. It has dodged the issue time and time again. That’s embarrassing, and the regulatory agency should be ashamed of itself. The public deserves better service. Regulators should care about doing their jobs properly, which means understanding the market they claim to regulate and explaining the reasoning behind their regulatory decisions. They have failed completely in this regard, and that is unacceptable.

Selig: The future of cryptocurrency in the United States may be decided by Congress rather than the courts. Even if the SEC prevails in its lawsuits against Coinbase, Binance, Ripple, and other companies (even all the way to the Supreme Court), we may still see legislation pass through Congress to establish a sensible regulatory market structure for cryptocurrency assets. Participants in the Coinbase, Binance, and other cryptocurrency ecosystems will eventually have a compliant pathway. Every major foreign jurisdiction is moving in this direction, and the US is unlikely to be the sole exception.

If you have been or are currently a lawyer in any litigation designated as one of the primary tokens of securities, how would you advise the foundation of that token?

Frye: I would advise them to liquidate the assets and expect to pay a fine. Perhaps a big fine.

Selig: Development companies and foundations associated with the crypto assets mentioned in the lawsuit may be inclined to intervene to defend the non-security status of crypto assets. These entities should carefully consider the potential risks and benefits of doing so with the help of legal counsel. Developers and users on these networks should also consult with legal counsel about their activities, but the SEC’s claim that certain crypto assets are securities is just that – a claim. They have not received judicial support for their assertion of securities status.

Do you think these cases will change the way Congress handles cryptocurrency regulation?

Frye: I think this is definitely a watershed moment. Ultimately, Congress decides what agencies can do. The Biden administration doesn’t seem to care about anything Gensler wants on cryptocurrency issues, which makes sense; he has bigger problems to deal with. But Congress can pass new legislation, at least theoretically. It can encourage the Biden administration to appoint new administrators. And it can push back against the way the SEC is making its decisions.

Selig: The SEC’s expansion of jurisdiction may backfire on it. Legislators on Capitol Hill have been eager to expand the Commodity Futures Trading Commission (CFTC), not the SEC’s jurisdiction over crypto assets, and may cut back on the SEC’s power over crypto assets related to decentralized or functional networks. The SEC has regulated by enforcement and angered this industry, without developing wise rules that are feasible for the crypto asset industry, reducing the need for comprehensive legislative solutions involving the CFTC. Therefore, industry participants may lean towards other market regulators.

Is it possible that the current situation could lead to a regulation that either bans most (if not all) cryptocurrencies, or subjects them to prohibitive registration and other requirements?

Frye: Yes, but I am skeptical of this. I think it is more likely that the SEC will make it more difficult to launch new cryptocurrencies.

Selig: It is unlikely that the current situation will lead to effective laws or regulations that ban cryptocurrencies in the United States. Legislators and regulators around the world recognize the tremendous potential of cryptocurrency as a technology and are working to develop sensible legal frameworks for this asset class. The US is slightly behind in this regard, but will also catch up. Every new type of investment product, from renewable energy certificates to credit default swaps, goes through a period of regulation before it becomes a fully regulated and certified asset class. Cryptocurrency is no exception.

What do you think is missing in the public discussion about cryptocurrency law?

Matt Stoller, anti-monopoly activist: While the courts or Congress may do some random things, the hype around cryptocurrencies has moved to AI, which although also accompanied by a lot of hype, is a useful technology. So the only question for cryptocurrency supporters is whether they can provide practical use cases beyond money laundering and speculation.

What message do these cases send to other cryptocurrency exchanges? Are you concerned if you are a US cryptocurrency exchange?

Frye: Yes. The SEC has made it clear that it is taking action, but it is unclear what it wants to achieve. This is a problem.

Selig: The information from the enforcement division of the SEC is very clear: “We generally agree with SEC Chairman Gensler’s view that most crypto-assets are securities.” This has been confirmed as the agency now claims that most of the top 10 crypto-assets by market cap are securities, with the notable exception of Bitcoin and Ethereum.

However, the law is not settled and will be litigated in multiple lawsuits, including Coinbase and Binance. The agency is spending a lot of resources litigating with Coinbase and Binance. I would be surprised if we see more cases related to cryptocurrency exchanges brought by the SEC in the short term. Cryptocurrency exchanges must continue to evaluate whether each cryptocurrency constitutes a security based on the unique facts and circumstances related to each cryptocurrency.

Regarding Binance, there are several allegations that, if true, would be very serious, including allegations of manipulating trades and practices that could put customers at risk (some similar to FTX). Is there reason to be concerned about using this exchange in the future?

Frye: I don’t know, but maybe?

Is there a more unfavorable SEC chairman for cryptocurrencies than Gary Gensler? (What is more destructive to cryptocurrencies?)

Frye: Everyone in the crypto space is complaining about Gary Gensler. I also have criticisms of his regulatory approach. But what if the head of the Federal Trade Commission was Lina Khan? Or, more realistically, what if Lina Khan decided that the FTC should regulate cryptocurrency issuance? Good luck, you’ll be begging Gary to come back.

Smith: Unfortunately, it’s clear that Chairman Gensler doesn’t care about his agency’s mission to protect investors. Just this week, the SEC indirectly referred to roughly $120 billion in crypto assets as securities. How does attempting to eliminate the markets for these tokens protect investors?

Could this lawsuit lead to the closure of Binance or Coinbase in the United States, or both?

Frye: Yes. I think it’s a very real possibility for Binance based on the complaint, but very unlikely for Coinbase, which has done everything it can to comply with the SEC’s rules and expectations, even when the SEC has been behaving badly.

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

Smith: It looks like Gensler has now laid all his cards on the table: he seems to believe that digital currencies should not exist in the United States. It’s clear that he’s very knowledgeable about this technology and has been open to exploring its potential in the past. He is also familiar with the business of public companies like Coinbase and the products and services that the SEC has approved, as well as their obligations in terms of financial disclosure. Therefore, without more information, observers can only speculate as to what Chairman Gensler’s motives are.

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