Source: The Wall Street Journal
Translated by: BitpushNews
Last year, the SEC sued cryptocurrency exchanges Binance, Coinbase, and Kraken, accusing these platforms of conducting unregistered securities sales, yet crypto executives refused to comply with financial rules they deemed unsuitable for digital currencies.
On one side is the crackdown under current chairman Gary Gensler, while on the other side, the crypto industry is calling for new crypto-specific regulations and a more lenient regulatory approach. If the SEC wins in court, these victories would force the free market to adhere to long-standing agency rules to protect investors purchasing securities. However, litigation could take many years to resolve, and with Donald Trump potentially returning to office, Gensler may no longer have time to handle these significant cases.
Trump's return to the White House means a new era for cryptocurrencies—government hurdles will be reduced.
The elected president has shed previous skepticism about cryptocurrencies, promising to support the digital asset industry and seeking to impose limits 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, with a lawyer seen as a potential successor to Gensler positioning himself as a critic of Gensler's lawsuits. Former SEC chief legal advisor Robert Stebbins stated that the agency should suspend most cryptocurrency lawsuits while clearing a path for these companies to operate without litigation threats.
"As long as there are no fraud allegations involved, my feeling is that the commission may dismiss these cases in the future," Stebbins said.
Other candidates on Trump's candidate list include former SEC commissioner Paul Atkins and former Coinbase chief legal officer Brian Brooks, who declined to comment.
Dismissing lawsuits would mean an end to the confrontational approach against the crypto industry, which began in 2017 during Trump's first term when the market was flooded with new digital assets being sold to the public without any restrictions. Trump had a critical stance on cryptocurrencies early in his term, stating their value was 'baseless.'
At the end of Trump's first term, the SEC sued Ripple Labs, which had sold $1.3 billion worth of the cryptocurrency XRP. Last year, the SEC suffered a significant setback in that case, marking a major defeat for the agency in litigation.
The rise of cryptocurrency exchanges at the onset of the Covid pandemic made it easier for a new wave of amateur traders to enter the market, driving 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. Previous SEC investigations settled dozens of cases with smaller market participants but failed to stop exchanges from adding many new tokens to their platforms.
In 2022, the sudden collapse of cryptocurrency exchange FTX and the successive failures of crypto lending institutions seemed to confirm Gensler's warnings about this rapidly growing, unregulated market. Individual investors lost billions on their holdings due to fraud and poor risk management within the industry.
Months after the collapse of FTX, the SEC issued its most severe allegations, accusing Coinbase, Kraken, and Binance of operating unlicensed exchanges for failing to comply with investor protection laws while selling securities.
While some smaller companies chose to settle with the SEC, larger exchanges see this as not a viable option. For them, settling on the SEC's terms would mean failure. For instance, Coinbase would have to delist many of the digital currencies it trades and stop offering other services like staking. Staking is a method that allows 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 believe that investment regulations designed for Wall Street do not apply to digital tokens intended to operate through peer-to-peer computer networks. For example, Coinbase argues that most cryptocurrencies are akin to commodities or collectibles, comparing them to baseball cards or Beanie Babies.
Gensler is set to leave next month, while 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 rejected 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 across the country are recognizing our actions to protect investors and have rejected all arguments that the SEC cannot enforce laws when issuing securities—regardless of the form of the securities issuance.'
Other judges have 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, coin by coin, court by court—may not be an effective way to proceed and could lead to inconsistent results.'
Some experts say the SEC has positioned itself as a police force, wasting precious time that should have been spent crafting 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 November speech that he was merely continuing the strategy adopted by former SEC Chairman Jay Clayton during Trump's first term.
Others believe Gensler had no choice but to use enforcement to target crypto companies he believes are violating 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 those regulations, leading both sides back to court.
Fagel said, 'Any rules that are not 100% accepted by the crypto industry will be drowned in litigation.'