In June 2023, the United States Securities and Exchange Commission (SEC) sued two major crypto exchanges, Binance and Coinbase, within a span of less than 24 hours. The allegations by the agency claimed that these exchanges were operating as unregistered stock exchanges, brokers, and clearing agencies. Notably, the SEC’s accusations against Binance were more severe, accusing CEO Changpeng Zhao and the company of engaging in deceptive practices that misled investors, including inflating trading volumes and orchestrating a “web of deception”.

The SEC’s actions have sparked debates among experts and industry participants, raising questions about the extent of regulatory authority, potential consequences for market innovation, and the overall stability of the crypto ecosystem.
In this article, we’ll explore the recent steps the SEC has taken to ground the crypto space, and we’ll also try to predict the outcome of this legal battle.

The SEC Attacks, The CEX Strikes Back

Coinbase and Binance, two largest and well-known cryptocurrency exchanges in the world, are currently facing legal challenges from the Securities and Exchange Commission (SEC). Binance initially responded by expressing cooperation with the SEC’s investigations while contesting and achieving partial relief against the freezing of its funds. Other obligations in the agreement will force Binance.US to create new crypto wallets that global employees will have no access to, provide additional data to the SEC, and agree to an expedited discovery schedule.
On the other hand, Coinbase has been involved in a prolonged dispute with the SEC, which began with the agency issuing a Wells notice in March, indicating potential securities regulation violations. Coinbase, in its response through a blog post and an official filing, argued that it had not violated any rules as it did not trade or platform securities. Furthermore, Coinbase took the unusual step of filing a petition for writ of mandamus, requesting the court to compel the SEC to address its request for rulemaking.
While it is hard to predict where this all will take us, we can surely look back and see why the SEC decided to go guns blazing against crypto.

Taming The Wild West

With all these legal battles, it is important not to lose your head and to remember who stands behind it. Just as the cryptocurrency space is inseparable from influential figures like Vitalik Buterin and Changpeng Zhao, it is difficult to envision the US Securities and Exchange Commission (SEC) without its leader, Gary Gensler, who took the spot in 2021. Under the leadership of Gary Gensler, there has been a consistent message to cryptocurrency companies: stringent measures are necessary to rein in a crypto market.

Gensler has been urging Congress to grant additional powers to the SEC in order to safeguard investors amidst what he describes as “Wild West” cryptocurrency markets teeming with “fraud, scams, and abuse”. While Gensler acknowledges the limited adoption of crypto assets as a medium of exchange, he notes their prevalent use in ransomware attacks and as a means to evade laws related to anti-money laundering, sanctions, and tax compliance. Consequently, he suggests categorizing them as “highly speculative stores of value,” placing the onus on regulators to protect investors within this asset class. Gensler’s motive remains centered on his belief that the SEC is uniquely positioned to shield investors, and there is simply no other way other than to tame the wild crypto space. 

Opinions among investors are divided when it comes to the impact of regulations on legitimizing the cryptocurrency space. While some believe that increased regulations will enhance its credibility, others worry that excessive regulatory intervention might erode its decentralized nature. At this point, it is difficult to definitively determine who is right or wrong in this debate, as it remains to be seen. Nonetheless, what is becoming clearer is the SEC’s strategy to exert control and regulation over the crypto space.

A significant milestone in the regulation of cryptocurrencies is the official classification of these assets, and progress has already been made in that direction.
To clarify this matter, it is important to note that If cryptocurrencies are classified as commodities, akin to crude oil or natural gas, the primary regulatory authority in the United States would be the Commodity Futures Trading Commission (CFTC), which oversees currency trading and would extend its purview to crypto trading.
However, if regulators lean towards categorizing cryptocurrencies as securities, similar to stocks, bonds, and exchange-traded funds, the Securities and Exchange Commission (SEC) would assume jurisdiction over them. SEC Chair Gary Gensler has expressed his belief that the majority of cryptocurrencies qualify as securities, using the Howey Test established by a 1946 Supreme Court ruling (SEC v. W.J. Howey Co.). Gensler has emphasized the need for these companies to comply with the law, signaling the SEC’s commitment to enforcing regulations. So what is a Howey Test anyway?

Under the Howey Test, a transaction is considered a security if it meets the following four criteria:

  • Money is invested.
  • There is an expectation that the investor will earn a profit.
  • The investment is in a common enterprise.
  • Profits are generated through the efforts of others.

Ultimately, The Howey test determines whether an asset qualifies as an “investment contract” and is therefore subject to federal security laws. And, as you might’ve already guessed, the SEC is looking to do everything to make as many cryptocurrencies securities as they can. In fact, Gary Gensler has already shared his thoughts on that matter, stating that most cryptocurrencies should be treated as securities. Notably, Gensler has made an exception for Bitcoin, classifying it as a commodity.

And indeed, the SEC was quite busy for the last half of the year. If you’ve been checking the news lately, you might’ve noticed that headlines like “The SEC files a lawsuit against…” or “The SEC charges…” pop up way too often. So let’s take a quick checkup of the previous six months that truly indicate that the SEC started its crusade against the crypto industry.

The SEC vs. Crypto Timeline

The battle between the SEC and the cryptocurrency industry didn’t start this year; the SEC’s efforts to regulate crypto have been ongoing for several years already: Ripple’s case or the crackdown on ICO just to name a few. However, the year 2023 has emerged as a pivotal period, characterized by significant and assertive moves taken by the SEC against the crypto space. Let’s take a look at some of the major moves from the SEC that we could witness for the last 6 months:

  • January 12: The SEC filed a lawsuit against Genesis and Gemini, accusing both firms of selling “unregistered securities.”
  • February 10: The SEC ordered Kraken to stop providing staking services to US clients and pay $30 million in fines.
  • February 16: The SEC charged Do Kwon, the founder of Terra, for allegedly deceiving US investors who had purchased his cryptocurrencies.
  • March 22: The SEC issued a notification to Coinbase, signaling an impending enforcement action as part of the ongoing regulatory crackdown on crypto.
  • June 5: The SEC sued Binance and its CEO Changpeng Zhao, alleging the operation of an unlicensed securities exchange in the US and “blatant disregard” for SEC rules.
  • June 6: Just a day after suing Binance, the SEC filed a lawsuit against Coinbase, accusing the popular exchange of operating illegally by not registering as an exchange and offering unregistered securities.
  • June 7: The SEC asked a federal court to issue a temporary restraining order to freeze the U.S. assets of cryptocurrency exchange Binance.

This crackdown on crypto shows that the SEC is taking this legal battle very seriously, and it seems like they’re not going to back down. So what is the reason why the SEC declared war on crypto, and where can this legal battle take us all? Let’s see what the experts think of this.

Why Does the SEC Want To Regulate Crypto Space?

Why does the SEC seem determined to regulate every aspect of the crypto space? What are their underlying motivations, and what potential benefits or risks do they perceive in this approach? These were the questions that we wanted the experts to answer.

Harman Singh, Director at Cyphere, thinks that “The SEC’s determination to regulate the cryptocurrency space can be attributed to several underlying motivations. Firstly, the SEC seeks to protect investors from fraudulent activities and scams prevalent in the crypto industry. By regulating various aspects, they aim to enhance investor confidence and ensure fair practices. Additionally, the SEC wants to prevent money laundering, illicit financing, and other illicit activities facilitated through cryptocurrencies. The potential benefits of SEC regulations include increased market stability, reduced fraud, and improved transparency.

By promoting regulatory compliance, the SEC hopes to create a more trustworthy and secure environment for investors and businesses operating in the crypto space.“

Angelo Sorbello, founder of LinkDelta, thinks that “The SEC’s approach to regulating the crypto space is motivated by a desire to protect investors and ensure the integrity of the markets. They are concerned about potential risks such as money laundering, fraud, and market manipulation, and they want to ensure that investors have access to accurate and reliable information. Additionally, they are concerned about the potential for cryptocurrencies to be used for illicit activities such as terrorism financing.”

However, there are opinions that SEC motivations lie not only in protecting investors and fighting money laundering.

Stuart Alderoty, Ripple’s chief legal officer, says that “I don’t think that the SEC under this leadership necessarily cares whether they win or lose in the courts. I think what they are engaging in is a coordinated campaign to essentially destroy the crypto economy in the United States“.

Daniel Novela, Founder of Novela Law, believes that “The SEC is misguided. They seem hell-bent on classifying many crypto products as securities, which I do not agree with. If they succeed, it will significantly stifle growth in this area in the US, potentially relegating the US to followers instead of leaders in crypto. The reason appears to be more government control, which I believe stems from a combination of (i) a misunderstanding of crypto and (2) a power grab by the SEC.”

What Does This Legal Battle Mean for Crypto?

The intensified crypto crackdown raises concerns over the potential difficulties for U.S. investors to trade their preferred digital currencies, posing a threat to the decentralized nature that initially attracted many crypto enthusiasts. Clear regulations for cryptocurrency exchanges are crucial to ensuring investor safety, especially given the recent bankruptcies of prominent platforms like FTX and Voyager. If successful in the courts, the SEC’s actions could compel crypto companies to register with the agency, leading to a significant shift in the industry.

The impact extends beyond Coinbase and Binance, as these lawsuits generate substantial uncertainty and erode confidence across the entire sector. In addition to Genesis and Gemini, the SEC has taken action against other crypto companies. Notably, Coinbase and Binance not only function as exchanges but also operate as brokerages and clearing agencies, a departure from the traditional finance landscape that SEC Chair Gensler views skeptically. Regulatory measures may impose restrictions on crypto usage and potentially stifle innovation within the sector. Speculation has also arisen about the SEC’s future targeting of decentralized finance (DeFi) and stablecoins, indicating that further regulatory actions may be on the horizon. But this is our opinion. Let’s see what the experts think on the potential outcome of the SEC’s war on crypto.

Jon Morgan, CEO and Editor-in-Chief of Venture Smarter, believes that “The impact of the SEC’s regulatory actions on the industry as a whole is multifaceted. On the one hand, well-defined regulations can bring clarity and legal certainty, leading to increased institutional participation and mainstream adoption. This could facilitate the maturation of the market, improve investor confidence, and attract more traditional financial institutions. On the other hand, excessive or overly burdensome regulations could hamper innovation, drive businesses away from the United States, or push them towards jurisdictions with more crypto-friendly regulatory frameworks. Striking a balance that fosters innovation while protecting investors will be crucial to ensuring a healthy and sustainable crypto ecosystem.”

Brian Dechesare, Founder at Breaking Into Wall Street, thinks that “In the near future, the SEC is probably going to keep regulating the cryptocurrency industry. They might concentrate on topics like security token offers (STOs), decentralized finance systems, and initial coin offerings (ICOs). It is also anticipated that cryptocurrency exchanges will be under more scrutiny for compliance with securities regulations. The SEC may address issues with stablecoins relating to investor protection, monetary stability, and potential classification as securities. Although the goals of these regulatory steps are to increase investor confidence, lower risks, and offer transparency to the sector, they could potentially increase compliance costs and have an adverse effect on innovation and market dynamics.”

Final Thoughts

The ongoing battle between the SEC and the crypto industry signifies a crucial moment in the evolution of cryptocurrencies and their regulation. The SEC’s relentless pursuit of regulatory frameworks and enforcement actions reflects its commitment to investor protection, market stability, and the need to bring the crypto space within the existing regulatory framework. However, the clash between regulation and the decentralized nature of cryptocurrencies raises concerns about potential implications for innovation and the overall appeal of the industry. The outcome of this ongoing conflict will shape the future of the crypto landscape, determining the balance between regulatory oversight and the preservation of the fundamental principles that attracted individuals to cryptocurrencies in the first place. As the crypto industry continues to mature, finding a harmonious and effective regulatory approach that balances innovation and investor protection will be a key challenge for regulators and market participants alike.