The US securities regulator’s lawsuits against crypto exchanges Binance and Coinbase this week marks its most aggressive legal assault on the digital asset market.
The Securities and Exchange Commission accused Binance and Coinbase, two of the industry’s biggest companies, of violating US securities laws, offering unregistered securities and operating as unregistered venues, among other charges. The duo account for half of global trading in digital assets.
Binance was also accused of mixing billions of dollars of customer cash with a separate trading firm owned by its chief executive and inflating its US platform’s trading volume.
The cases are the most high profile enforcement actions by the agency after repeated warnings from chair Gary Gensler that crypto exchanges and the tokens they were trading were likely falling foul of US federal laws.
After his appointment two years ago, Gensler frequently urged platforms to register with the agency and flagged that most digital tokens qualify as securities. His language hardened in recent months after the failure of the FTX crypto exchange last November.
After two big lawsuits in two days, the former Goldman Sachs banker-turned-regulator, who built a reputation in Washington for a hard-charging approach, was strident.
“We don’t need more digital currency,” Gensler told CNBC on Tuesday. “We already have digital currency. It’s called the US dollar. It’s called the euro or it’s called the yen, they’re all digital right now.”
Critics have bristled at the SEC’s approach, accusing the agency of failing to define the rules for their long-term policy for the crypto industry and instead regulating the market through enforcement actions.
“Regulation by enforcement is not an appropriate way to govern a market,” said Glenn Thompson, chair of the House of Representatives Committee on Agriculture at a hearing on the future of digital assets in Washington on Tuesday.
One of the crypto industry’s biggest complaints has been a perceived lack of clarity from the US regulator over what counts as a security. With the two lawsuits, the SEC laid out a list of more than a dozen coins it considers securities, including popular crypto tokens Solana, Cardano and Polygon.
By naming them, some lawyers think the agency has left the door open to target other crypto trading venues.
“These are complaints that strike to the very heart of the crypto exchange business model,” said Peter Fox, partner at law firm Scoolidge, Peters, Russotti & Fox. “They didn’t choose obscure digital assets that might only be on Binance to make their case, they chose well known, widely traded assets that are likely to be listed on many exchanges.”
But Gensler believes existing rules are sufficiently clear.
“I think there’s been clarity for years,” Gensler told CNBC, adding that investors are protected by securities laws and “crypto should be no different”.
Brian Armstrong, chief executive of Coinbase, said the SEC was relying on an “enforcement-only approach” that was “harming America” and that “the SEC and [Commodity Futures Trading Commission] have made conflicting statements, and don’t even agree on what is a security and what is a commodity”.
He added: “So if we need to avail ourselves of the courts to get clarity, so be it.”
Binance said the SEC’s actions “appear to be part of a rushed effort to claim jurisdictional ground from other regulators — and investors do not appear to be the SEC’s priority”.
Both exchanges have indicated they will fight the SEC’s charges in court. Coinbase has also said it will continue to lobby politicians to pass clearer rules for the crypto market in the US.
Gautam Chhugani, senior analyst of global digital assets at Bernstein, said: “The exchanges are going to dispute this and that dispute can only be resolved by Congress or the judiciary, whichever is earlier.”
But with lawmaking and enforcement cases likely to take years, some observers expect the regulators to file more cases in the meantime.
In recent months, US regulators have embarked on enforcement actions against crypto companies operating in the country including exchange Bittrex and Gemini, the crypto venue founded by the Winklevoss twins.
The SEC claimed Gemini and crypto lender Genesis ran a cryptoasset lending programme that was not registered as a securities offering, while the CFTC, the US derivatives regulator, in March sued Binance, accusing it and its chief executive Changpeng Zhao of operating illegally in the US.
“It is a very clear clampdown on the space and I don’t think the SEC is likely to stop here,” said Mark Palmer, analyst at Berenberg, about the Coinbase and Binance lawsuits. “I don’t know how any crypto exchange could think other than that it could be the next to be tapped.”
Crypto companies argue there is no easy path for them to register with the SEC, and that they find themselves in a precarious position. Gensler on Tuesday compared crypto venues unfavourably to traditional stock markets such as the New York Stock Exchange. The latter does not operate a hedge fund or make markets, he said.
He said: “If there’s real value in the crypto tokens, then compliance will build trust and the business model might change. It’s the hard work of earning the investing public’s trust.”
Fox, at law firm Scoolidge, said that even if crypto exchanges stripped down their services to resemble a traditional exchange “they would still have a massive problem because . . . you can only list classes of securities that are registered under the exchange act.”
“If the [crypto] exchanges registered as exchanges, they wouldn’t be allowed to conduct their business in any form remotely resembling what they do,” he said.
Additional reporting by Scott Chipolina in London