Source: The Wall Street Journal
Compiled by: Bitpush News
Last year, the U.S. Securities and Exchange Commission (SEC) sued cryptocurrency exchanges Binance, Coinbase, and Kraken, accusing these platforms of conducting unregistered securities sales. However, crypto executives refused to comply with financial rules they deemed unsuitable for digital currencies.
On one side is the crackdown led by current chairman Gary Gensler, and on the other side is the crypto industry calling for new regulations specifically for cryptocurrencies, advocating for a more lenient regulatory approach. If the SEC wins in court, these victories will force the free market to adhere to long-established institutional rules meant to protect investors purchasing securities. However, litigation may take years to resolve, and with Donald Trump's re-election, Gensler may have little time to handle these major cases.
Trump's return to the White House means cryptocurrencies will enter a new era—government obstacles will be reduced.
The elected president has shed previous skepticism towards cryptocurrencies, promising to support the digital asset industry while seeking to impose limits on the independence of agencies like the SEC and the Federal Reserve. Leaders in the crypto industry also expressed support for his return.
The next SEC chair may offer favorable solutions to cryptocurrency exchanges, with a lawyer viewed as a potential successor to Gensler positioning himself as a critic of Gensler's lawsuits. Former SEC Chief Counsel Robert Stebbins stated that the agency should suspend most cryptocurrency lawsuits while clearing a path for these companies to operate without litigation concerns.
"As long as there are no allegations of fraud, my feeling is that the committee may dismiss these cases in the future," Stebbins said.
Other candidates on Trump's shortlist include former SEC commissioner Paul Atkins and former Coinbase chief legal officer Brian Brooks, who declined to comment.
Dropping the lawsuits would mean an end to the confrontational approach taken against the crypto industry, which began in 2017, during Trump's first term, when the market was flooded with new digital assets sold to the public without restrictions. Trump initially criticized cryptocurrencies in his early term, stating their value was 'baseless.'
At the end of Trump's first term, the SEC sued Ripple Labs, which sold $1.3 billion worth of cryptocurrency XRP. Last year, the SEC lost the case, marking a significant setback for the agency in litigation.
In the early days of the Covid pandemic, the rise of cryptocurrency exchanges made it easier for a new wave of amateur traders to enter the market, driving digital currency prices to new heights.
Gensler shifted the SEC's focus from hundreds of token issuers to these exchanges and similar intermediaries.
He believes this is a more effective way to deal with rampant non-compliance. Previous SEC investigations reached dozens of settlements with smaller market participants but did not stop exchanges from adding many new tokens to their platforms.
In 2022, the sudden collapse of the cryptocurrency exchange FTX and the subsequent failures of crypto lending institutions seemed to confirm Gensler's warnings about this rapidly growing, unregulated market. Due to fraud and poor industry risk management, individual investors lost billions of dollars on their holdings.
Months after the FTX collapse, the SEC issued its harshest charges, accusing Coinbase, Kraken, and Binance of operating unlicensed exchanges for failing to comply with investor protection laws when selling securities.
While some smaller companies chose to settle with the SEC, large exchanges do not see this as a viable option. For them, settling on the SEC's terms means failure. For example, Coinbase would have to delist many digital currencies from trading and stop offering other services like staking. Staking is a way for traders to earn additional returns by holding tokens. Other SEC regulations prohibit exchanges from holding investors' assets, forcing exchanges to split their businesses into different companies.
Cryptocurrency companies believe that investment regulations designed for Wall Street do not apply to digital tokens intended to operate through peer-to-peer computer networks. For instance, Coinbase argues that most cryptocurrencies are akin to commodities or collectibles, comparing them to baseball cards or Beanie Babies.
Gensler will leave next month, and some of the SEC's legal arguments have been accepted in the preliminary stages of litigation. In his recent victory, a federal judge in San Francisco fully dismissed one of Kraken's arguments and accepted the SEC's view on how to apply legal tests to determine which investments qualify as securities.
In a recent speech, Gensler stated, "Courts have recognized our actions to protect investors and dismissed all arguments that the SEC cannot enforce the law when issuing securities—regardless of the form of the securities issued."
Other judges have expressed reservations about this.
This summer, U.S. District Judge Amy Berman Jackson in Washington, D.C. wrote when dismissing part of the SEC's charges against Binance, "The agency's decision to regulate this multi-billion dollar industry through litigation—case by case, token by token, court by court—may not be an effective way and could lead to inconsistent results."
Some experts argue that the SEC positioned itself as a policeman, wasting valuable time that should have been spent developing a new set of rules to provide more direct protection for investors and consumers. Sarah Hammer, executive director of the Wharton School at the University of Pennsylvania, stated, "This is not the right approach."
Gensler stated in a speech in November that he was merely continuing the strategy adopted by former SEC chair Jay Clayton during Trump's first term.
Others believe that Gensler had no choice but to utilize enforcement to target crypto companies he believes violate securities laws. Marc Fagel, former director of the SEC's San Francisco office, stated that if he chose to provide new industry regulations, companies would likely challenge these regulations, and both sides would end up in court.
Fagel said, "Any rules not 100% accepted by the crypto industry will be drowned in litigation."
