U.S. regulators are trying to use their "most powerful weapon" to regulate the cryptocurrency market, but they may now "put down their weapons."
Source: The Wall Street Journal
Compilation: Bitpush News
Last year, the 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, there are the enforcement actions led by current Chairman Gary Gensler, and on the other side, the crypto industry is calling for new crypto-specific regulations and urging for a more lenient regulatory approach. If the SEC wins in court, these victories will force the free market to adhere to long-standing institutional rules to protect investors purchasing securities. However, lawsuits may take many years to resolve, and with Donald Trump in office again, Gensler may not have time to deal with these major cases.
Trump's return to the White House means that cryptocurrency will enter a new era—government obstacles will diminish.
The elected president has shed previous skepticism towards cryptocurrencies and pledged support for the digital asset industry, also seeking to impose restrictions on the independence of agencies like the SEC and the Federal Reserve. Leaders in the crypto industry have also expressed support for his return.
The next SEC chairman may offer favorable solutions to cryptocurrency exchanges, as a lawyer seen as a successor to Gensler positions himself as a critic of Gensler's litigation. Former SEC Chief Legal Counsel Robert Stebbins stated that the agency should pause most cryptocurrency lawsuits while clearing a path for these companies to operate without the specter of litigation.
"As long as there are no fraud charges involved, my feeling is that the committee might dismiss these cases in the future," Stebbins said.
Other candidates on Trump's list include former SEC Commissioner Paul Atkins and former Coinbase Chief Legal Officer Brian Brooks, both of whom declined to comment.
Dismissing 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 any restrictions. Trump had a critical attitude towards cryptocurrencies early in his term, stating that their value was "baseless."
At the end of Trump's first term, the SEC sued Ripple Labs for selling $1.3 billion worth of cryptocurrency XRP. Last year, the SEC lost in this case, marking a significant setback for the agency in litigation.
At the beginning of the Covid pandemic, the rise of cryptocurrency exchanges made it easier for a new wave of amateur traders to enter the market, pushing digital currency prices to new highs.
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. The SEC's previous investigations reached dozens of settlements with smaller market participants but did not stop exchanges from adding many new tokens on their platforms.
In 2022, the sudden collapse of cryptocurrency exchange FTX and the subsequent failures of crypto lending institutions seemed to confirm Gensler's warnings about this fast-growing, unregulated market. Due to fraud and poor industry risk management, individual investors lost billions of dollars on their holdings.
Months after the collapse of FTX, the SEC issued its most severe 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 have chosen to settle with the SEC, larger exchanges believe this is not a viable option. For them, settling under SEC's conditions would mean 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 income by holding tokens. Other SEC regulations prohibit exchanges from holding investors' assets, forcing exchanges to split their businesses into different companies.
Cryptocurrency companies argue that investment regulations designed for Wall Street do not apply to digital tokens that are intended to operate via peer-to-peer computer networks. For example, Coinbase stated that most cryptocurrencies are akin to commodities or collectibles, comparing them to baseball cards or Beanie Babies.
Gensler will step down next month, and some of the SEC's legal arguments have already been accepted in the preliminary stages of litigation. In a recent victory, a federal judge in San Francisco entirely 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 are increasingly recognizing our actions to protect investors and dismissing all arguments that the SEC cannot enforce laws when issuing securities—regardless of the form of the securities issuance."
Other judges expressed reservations about this.
This summer, U.S. District Judge Amy Berman Jackson in Washington, D.C., wrote when dismissing some 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 case by court case—may not be an effective way to do so and could lead to inconsistent results."
Some experts say the SEC positioned itself as a patrol officer, wasting precious 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."
In a speech in November, Gensler stated that he was merely continuing the strategy adopted by former SEC Chairman Jay Clayton during Trump's first term.
Others believe that Gensler has no choice but to use enforcement to crack down on crypto companies that he believes are violating securities laws. Marc Fagel, former director of the SEC's San Francisco office, stated that if he chose to offer new industry regulations, companies would likely challenge those regulations, ultimately leading both parties back to court.
Fagel said, "Any rules that are not 100% accepted by the crypto industry will be drowned in litigation."
