How will the SEC's lawsuit against Coinbase and Binance change the cryptocurrency industry?

Author: Susan Feng, BitpushNews

Once upon a time, in the bustling world of cryptocurrency, two giants dominated the landscape: Binance and Coinbase. Their platforms enabled millions of people worldwide to trade digital currencies, and their influence spanned the entire crypto market. However, as their power grew, so did the scrutiny they faced.

In early June 2023, the powerful force of the U.S. Securities and Exchange Commission (SEC) turned its attention to these two cryptocurrency giants. The SEC accused Coinbase and Binance of violating regulations, requiring them to register as exchanges and be subject to federal oversight, leading to lawsuits against them. More specifically, the SEC alleged that Coinbase traded at least 13 cryptocurrencies that were essentially securities, which should have been registered with regulators before issuance. These assets included well-known tokens such as Solana, Cardano, and Polygon. The basis of these allegations is that because Coinbase allowed trading of these tokens, the SEC classified them as securities, thus the company should register as an exchange, broker, and clearing agency.

This lawsuit marks the culmination of SEC Chairman Gary Gensler's two-year effort to shift his agency's enforcement strategy in the cryptocurrency space from targeting individual token issuers to focusing on the online platforms trading these assets. Companies like Coinbase enable customers to transfer dollars from their bank accounts to buy or sell cryptocurrencies, a stark contrast to the days when potential traders had to find each other on message boards or similar clunky forums, negotiate prices, and hope their trading partners were honest.

Gensler warned that cryptocurrency exchanges need to register with the SEC. Such companies handle functions that some securities exchanges cannot, including holding customer assets and clearing transactions. His solution is to require cryptocurrency exchanges to separate their order execution, brokerage, and clearing functions, a structure that would better reflect how Wall Street operates, with stock exchanges, brokers, and clearing firms operating as independent businesses adhering to rules tailored to their operations and risks.

Cryptocurrency exchanges resisted Gensler's demands to reshape themselves in Wall Street's image. They also argued that many tokens are not securities and that token developers cannot provide financial disclosures like publicly traded companies. This did not persuade Gensler or his enforcement staff. Gensler stated on CNBC's Tuesday program, "Without proper disclosures, the public cannot answer whether this is a scam or something else."

The impact of the SEC's allegations was immediate. Coinbase's stock price fell 17% in early trading, sending shockwaves through the crypto market. Binance also felt the sting, as the SEC sent a clear signal: the era of unregulated cryptocurrency trading is coming to an end. Cryptocurrency exchanges began reviewing their practices in hopes of avoiding the fate of Binance and Coinbase. For ordinary investors, these allegations sparked a wave of anxiety. The future of cryptocurrency, once seen as a new frontier of financial freedom, now seems uncertain. Many are concerned about whether the next Bitcoin bull market can still arrive, as increased regulation may cast a shadow over the industry's future growth.

Facing mounting regulatory pressure, Coinbase launched a series of legal and public relations efforts to inform lawmakers that the SEC is engaging in a power play against a new technology that does not fit its rules. Some Republican House members expressed sympathy for Coinbase's concerns, and Coinbase's Chief Legal Officer Paul Grewal is set to testify before the House Agriculture Committee on Tuesday, which has been considering whether some crypto assets should be classified as commodities rather than securities.

However, amidst this turmoil, some voices within the industry expressed cautious optimism. Aaron Kaplan, co-CEO and co-founder of Prometheum Inc., viewed the SEC's actions as a significant step toward a regulated market infrastructure for cryptocurrencies, stating to Coindesk that he believes this will ultimately help the industry move forward. He anticipates a different competitive landscape, but one that will yield net benefits for U.S. investors and should allow innovation to thrive.

Others, like Richard Mico, CEO and Chief Legal Officer of Banxa USA, pointed out the negative impact of the ongoing lack of regulatory clarity. He warned in an interview with Coindesk that the current situation could drive digital asset businesses out of the U.S. to more friendly jurisdictions, potentially depriving the U.S. of jobs and innovation.

Dan Raju, CEO of fintech company Tradier, told Blockworks that greater and clearer SEC regulation of cryptocurrencies is imminent. He believes that while these changes may impact cryptocurrency prices in the short term, they will create conditions for retail confidence in cryptocurrencies in the long run.

Despite the challenges, these industry insiders expressed confidence in the resilience and innovative potential of the cryptocurrency sector. Their views reflect a cautious optimism, a belief that the industry can adapt and grow despite regulatory hurdles.

However, not all perspectives are positive. Kristin Smith of the Blockchain Association expressed frustration with the SEC's latest assault, noting that the regulator does not "make laws—it just brings charges."

As the industry grapples with the consequences of the SEC's allegations, the future of cryptocurrency remains uncertain. However, it is certain that the coming years will be a decisive period for the cryptocurrency industry, with the world watching closely.