It seems like just yesterday that cryptocurrency was being hyped as the next big thing in expensive Super Bowl ads featuring big-name celebrities. The vibe is markedly different this week after the Securities and Exchange Commission sued two of the biggest crypto exchanges, alleging they violated securities law.
The SEC’s charges against Binance and Coinbase vary in scale and scope, but both sets result from increased regulatory scrutiny toward just what products these exchanges sell to consumers. That has been a major question mark, one that has left the industry begging for clarity from the SEC and Congress about how the government views the “tokens” trade, which has produced billions in transaction fees for these major markets. Now they have their answer — and it’s not one that they’re going to like.
According to the SEC’s complaints, both Coinbase and Binance allegedly ignored their need to register with the SEC as exchanges, brokerages and clearing agencies — functions that are usually performed by three separate companies. Coinbase, which is U.S.-based, is further accused of selling at least 13 crypto assets on its market that count as securities. Binance and its founder, Changpeng Zhao, are meanwhile also charged with misusing customers’ funds by commingling them with the company’s finances and falsely portraying Binance’s U.S. platform as an entirely separate platform “as part of an elaborate scheme to evade U.S. federal securities laws.” (Both companies have denied the allegations.)
At the heart of the lawsuits — and the crypto industry’s pushback — is an unanswered question: “Is a token a security or a commodity?” The former includes “investment contracts” like stocks and bonds, in which someone invests money in a venture and expects to see profits as a result. Commodities, on the other hand, are usually physical things that can be bought on exchanges in bulk — like oil, corn or wheat — before they’re actually produced.
The answer matters as far as which regulatory agency gets to set the rules for the industry. While the SEC has jurisdiction over securities, the crypto industry would much prefer its products to be seen as the latter, not least because they fall under the jurisdiction of the Commodity Futures Trading Commission, which has looser enforcement mechanisms than the SEC. (It’s worth noting, though, that the CFTC has also sued Binance in a separate matter.)
But that’s a hard case to make when so many of the digital coins minted over the last decade can’t be used to actually buy anything other than digital coins. The transfer of funds from one coin trading platform to another has become reliant on exchanges like Binance and Coinbase, which also hold on to their customers’ assets and settle their trades. And the markets have sold themselves to the public mostly as places to invest in digital assets and turn a profit on those investments.
The ambiguity has spurred the industry to invest a good chunk of its revenue into making sure that regulators don’t apply current securities law to it or its products — and if that fails, lobbying Congress to change the law to exclude digital tokens explicitly. Coinbase in particular has been loudly complaining that the SEC should bear some of the blame if it finds any issue with the company’s actions. After all, Coinbase lawyers argued in a letter to the SEC last month, the agency cleared Coinbase’s initial public offering in April 2021, which required a close look at its finances. And, Coinbase has argued in letters and lawsuits, the uncertainty of the regulatory landscape means that it can’t possibly be expected to comply with laws that it believes don’t apply to its products.
At the heart of the lawsuits — and the crypto industry’s pushback — is an unanswered question: “Is a token a security or a commodity?”
That lament has had little sway with SEC Chair Gary Gensler, who was sworn in shortly after Coinbase’s shares began trading on the Nasdaq exchange. Gensler’s approach assumes that, yes, securities law that already exists applies to the crypto industry, an approach that makes sense to me given how many coins exist seemingly for the explicit purpose of producing profits for their creators. That has corresponded with a slow but steady ramp-up of enforcement actions against assets the SEC has said are being sold illegally, because they’re obviously securities. The moves against Binance and Coinbase are about to put that theory to the ultimate test.
But the crypto industry isn’t going to go down without a fight. In an interview on Bloomberg’s Odd Lots podcast in March, Coinbase CEO Brian Armstrong indicated that if the SEC were to determine that some of the assets being traded are securities, then the company would take that issue to the courts. And with the industry’s massive war, any litigation is sure to be lengthy and contentious.
Still, it’s better to have that argument now rather than later. Coinbase is right that there are a lot of questions about how much power the SEC actually has over crypto. It would be great if it and the CFTC — which claims dominion over cryptocurrencies like bitcoin and ether — could come to a consensus about their respective digital fiefdoms. Even better would be if Congress were to step in and pass legislation to strengthen government oversight and consumer protections against the fraud and profiteering that have gone hand in hand with the rise of digital coin speculation.
Barring that, I’d rather see the SEC swing for the fences in the name of keeping the crypto industry in check. That approach is far more preferable to idly standing by as a technologically advanced form of legalized gambling masquerades as a great equalizer, bringing the world of finance — and the false promise of nigh unlimited profits — to the masses.
