U.S. lawyers discuss the direction of the SEC's lawsuits against Binance and Coinbase: the outcome may be very different

Source: CoinDesk

Compiled by: Wu Says Blockchain

Gary Gensler, the skeptical regulator of cryptocurrency --- during his tenure, he has suggested that proof-of-stake tokens are securities, implied that all cryptocurrency exchanges are illegal enterprises, and hinted that all cryptocurrencies except one qualify as "investment contracts" under the Howey test, which is the standard for determining whether a financial asset is a security ------ has sued Binance and Coinbase this week.

Facing the world's largest cryptocurrency exchange (Binance) and the largest publicly traded cryptocurrency company (Coinbase), Gensler is likely to face a battle. Coinbase's CEO Brian Armstrong stated months ago that the SEC was preparing its case, and if a lawsuit were filed, the exchange would fight back.

Gensler's actions could represent a federal enforcement action that may ultimately be submitted to the U.S. Supreme Court. The case against Coinbase could prompt Congress to take action on cryptocurrency regulation. The broader allegations against Binance, if proven true, could disrupt one of the most profitable businesses of the 21st century to date.

These are the known unknowns. But the SEC's barrage of attacks this week also reveals the agency's approach to cryptocurrency and why such aggressive new information is emerging.

CoinDesk reached out to several legal authorities and cryptocurrency observers to better understand what might happen next and what these cases could mean for the future of the industry. The resulting roundtable discussion provided various perspectives on an uncertain situation.

Do companies have reason to be optimistic about these lawsuits?

Brian Frye, attorney: Perhaps. I am not optimistic about the SEC's allegations against Binance; the accusations are severe, and Binance has essentially admitted to all of the SEC's charges. This is a disaster.

I think Coinbase's situation is much better. It has been trying to comply with the SEC's rules for a long time, but the SEC has refused to engage with Coinbase's compliance efforts. I don't think that's a good sign, and I think at least some courts may take issue with that.

Courts expect agencies to act in a predictable manner. Coinbase has been asking the SEC what it wants, and the SEC has consistently refused to respond. This could make Coinbase look like a good actor while the SEC appears to be the bad actor.

Moreover, I believe the SEC has still not provided even a slightly clear explanation of what it wants to regulate, what it believes it has the authority to regulate, why it wants to regulate, in what manner it wants to regulate, what it hopes its regulation will achieve, or really any explanation about anything; that is a problem.

If the SEC wants to regulate it, it is 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 dislikes them, hasn't explained why it thinks they are a problem, and hasn't even pretended to explain how it would regulate crypto assets in a way it believes is more consistent with its regulatory duties.

This is an important issue. Agencies must have credibility, and the SEC has a credibility problem. It is showing its power and will cause a lot of trouble for cryptocurrency companies in the short term. But it also has to consider the long term.

Recently, the SEC has been harshly criticized by courts for overreach regarding administrative law judges (ALJs). I wouldn't be surprised if courts take a close look at its practices regarding crypto assets, especially for those companies trying to comply but being rebuffed by the agency.

Mike Selig, attorney: The SEC's lawsuits are not entirely negative for cryptocurrency. In the context of these lawsuits, foreign jurisdictions are adopting cryptocurrency laws and regulations, and U.S. lawmakers are discussing cryptocurrency market structure legislation on Capitol Hill. Every time the SEC sues another cryptocurrency company, especially if that company publicly states it is trying to comply with relevant laws and regulations, the political pressure on U.S. lawmakers to pass reasonable cryptocurrency legislation becomes stronger.

These lawsuits encourage companies seeking to comply with clearly applicable rules to leave the U.S., as 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 two largest cryptocurrency companies in the world, as these lawsuits could prompt Congress to recognize that the SEC's method of regulating through enforcement is not working and that comprehensive legislation is needed ------ otherwise, the industry will flee to more lenient jurisdictions.

Kristin Smith, CEO of the Blockchain Association: The SEC's actions this week have made the path forward clear and urgent: Congress must take action. The "Digital Asset Market Structure" discussion draft introduced last week by House Financial Services Committee Chairman Patrick McHenry and House Agriculture Committee Chairman Glenn Thompson is a step toward effective regulation. As countries around the world take action to bring responsible regulation to cryptocurrency, it is crucial for the U.S. to remain competitive.

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

Smith: The SEC does not make laws; it merely brings charges. Enforcement actions are just the agency's opinions, and the courts will decide whether its interpretation of the law is correct. Unless the SEC wins, business may continue as usual.

Do the lawsuits against Binance and Coinbase reveal a new way of thinking within the agency regarding 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 listen. "Is this a security?" is not a fundamental question. If the SEC wants to regulate it, it is a security. Therefore, the real question is what the SEC wants to regulate, why it wants to regulate these things, how companies fit into the SEC's regulatory goals, and whether all of this makes sense.

Selig: To quote Battlestar Galactica: "All this has happened before. All this will happen again." For years, the SEC has been gradually building a legal theory regarding the securities status of crypto assets and the appropriate registration categories for various crypto asset intermediaries. The lawsuits against Coinbase and Binance are the culmination of everything that has come 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, these complaints are worth reading.

That said, there are some novel aspects in these complaints. For Coinbase, the SEC asserts for the first time that providing non-custodial digital wallet software constitutes broker-dealer activity because the wallet can be used to buy and sell so-called securities through third-party decentralized applications, and the software developers charge fees.

In the case of Binance, the SEC asserts that BUSD is a 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 a new theory ------ namely, that Binance uses the profits from the sale of BUSD to provide various yield programs for BUSD holders. In both complaints, the SEC argues that many crypto assets are securities, which it has not previously considered securities in lawsuits against issuers or other secondary participants.

In the long term: If the SEC wins, and Coinbase/Binance loses in the Supreme Court, what will cryptocurrency look like?

Frye: Good question; it depends on what the SEC wants to achieve. If it wants to destroy cryptocurrency, it likely can do so as long as Congress allows it. Or at least, it could roll cryptocurrency regulation back to where it was in the early 21st century. But I don't think that will happen. The SEC is conservative and doesn't like new things, but it also realizes it is regulating a market. I think it will ultimately realize it must take its regulatory responsibilities more seriously.

But again, I am disappointed with the SEC and its response to cryptocurrency regulation. I believe regulation can be done well and effectively. But the SEC hasn't even tried to create coherent regulatory rules for crypto assets. It has repeatedly dodged the issue. This is embarrassing, and the agency should be ashamed of itself. The public deserves better service. Regulators should care about doing the actual work, which means understanding the markets they claim to regulate and explaining the rationale behind their regulatory decisions. Failing completely in this regard is unacceptable.

Selig: The future of cryptocurrency in the U.S. may be determined by Congress rather than the courts. Even if the SEC wins its lawsuits against Coinbase, Binance, Ripple, and others (even all the way to the Supreme Court), we could still see legislation cross Congress to establish a sensible regulatory market structure for crypto assets. Coinbase, Binance, and other participants in the crypto ecosystem will ultimately have a compliant path. Every major foreign jurisdiction is moving in this direction, and the U.S. is unlikely to be the only exception.

If you were or are a lawyer for one of the major tokens designated as securities in any of the lawsuits, how would you advise the foundation for that token?

Frye: I would advise them to divest assets and anticipate paying fines. Perhaps a large fine.

Selig: Development companies and foundations associated with the crypto assets mentioned in the lawsuits may be inclined to intervene to defend the non-security status of the 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 legal counsel regarding their activities, but the SEC's claim that certain crypto assets are securities is merely an assertion. They have not yet received judicial determinations supporting the securities status.

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

Frye: I think this is absolutely a watershed moment. Ultimately, Congress decides what agencies can do. The Biden administration seems indifferent to anything Gensler wants regarding cryptocurrency, which makes sense; he has bigger issues to deal with. But Congress can, at least in theory, pass new legislation. It can encourage the Biden administration to appoint new leadership. And it can oppose the SEC's decision-making approach.

Selig: The SEC's expansion of jurisdiction could get it into trouble. Lawmakers on Capitol Hill have been eager to expand the Commodity Futures Trading Commission's (CFTC) jurisdiction over crypto assets rather than the SEC's, and they may cut back the SEC's power over crypto assets related to decentralized or functional networks. The SEC has angered the industry by regulating through enforcement without creating viable, sensible rules for the crypto asset industry, thereby reducing the need for comprehensive legislative solutions involving the CFTC. As a result, industry participants may lean toward other market regulators.

Is it possible that the current situation could lead to regulations that either ban most (if not all) cryptocurrencies or subject them to prohibitive registration and other requirements?

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

Selig: The current situation is unlikely to lead to laws or regulations that effectively ban crypto assets in the U.S. Legislators and regulators around the world recognize the tremendous potential of crypto as a technology and are developing sensible legal frameworks for this asset class. The U.S. is slightly behind in this regard but will catch up. Every new type of investment product, from renewable energy certificates to credit default swaps, has to go through a regulated period before becoming a formally regulated and certified asset class. Cryptocurrency is no exception.

What do you think is missing from the public discussion about crypto law?

Matt Stoller, antitrust activist: While courts or Congress may do something random, the hype around cryptocurrency has shifted to AI, which, while also accompanied by a lot of hype, is a useful technology. So for supporters of cryptocurrency, the only question is whether they can provide practical use cases beyond money laundering and speculation?

What message do these cases send to other crypto exchanges? If you are a U.S. crypto exchange, should you be worried?

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

Selig: The message from the SEC's enforcement division is very clear: "We generally agree with SEC Chairman Gensler's view that most crypto assets are securities." This is confirmed as the agency has now claimed that the majority of the top ten crypto assets by market capitalization are securities, clearly excluding Bitcoin and Ethereum.

However, the law is not yet settled and will be litigated in multiple lawsuits, including the Coinbase and Binance cases. The agency is spending significant resources suing Coinbase and Binance. If we see the SEC filing more cases related to crypto asset exchanges in the short term, I would be surprised. Crypto asset exchanges must continue to evaluate whether each crypto asset constitutes a security based on the unique facts and circumstances associated with each asset.

There are several serious allegations against Binance, if proven true, including accusations of manipulating trades and potentially putting 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 it could be?

Is there a more detrimental SEC chairman for cryptocurrency than Gary Gensler? (What would be more destructive for cryptocurrency?)

Frye: Everyone in the crypto space is complaining about Gary Gensler. I also criticize his regulatory approach. But what if the head of the Federal Trade Commission is Lina Khan? Or more realistically, what if Lina Khan decides the FTC should regulate cryptocurrency issuance? Good luck; you would be begging for Gary to come back.

Smith: Unfortunately, it is clear that Chairman Gensler does not care about his agency's mission to protect investors. Just this week, the SEC indirectly labeled about $120 billion worth of crypto assets as securities. How is trying to eliminate the market for these tokens protecting investors?

Could this lawsuit lead to Binance or Coinbase shutting down in the U.S., or both?

Frye: Yes. I think this is a very real possibility for Binance based on the complaints, but it is very unlikely for Coinbase because Coinbase has done everything it can to comply with the SEC's rules and expectations, even when the SEC has acted improperly.

What do you think about Gary Gensler's statement that the world does not need digital currencies because the dollar, euro, and yen are all digital currencies? Why does Gensler make normative statements about the industry instead of focusing on his actual mandate?

Smith: It seems that Gensler has now laid all his cards on the table: he appears to believe that digital currencies should not exist in the U.S. It is clear that he is very knowledgeable about this technology and has previously been open to exploring its potential. He also understands the business of publicly traded companies like Coinbase, as well as the products and services that the SEC has approved, and their obligations regarding financial disclosures. Therefore, without more information, observers can only speculate about what Chairman Gensler's motivations are.