Article republished from: BitPush
Source: The Wall Street Journal
Translation: BitpushNews
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 is the crackdown led by current chairman Gary Gensler, while on the other side is the crypto industry calling for new crypto-specific regulations and advocating for a more lenient regulatory approach. If the SEC wins in court, these victories will force the free market to comply with long-standing institutional rules to protect investors purchasing securities. However, litigation could take years to resolve, and with Donald Trump's potential re-election, Gensler may not have time to handle these big cases.
Trump's return to the White House means a new era for cryptocurrency—government obstacles will be reduced.
The elected president shed the previous skepticism towards cryptocurrency, promising support for the digital asset industry, and he also hopes to impose limits on the independence of agencies such as the SEC and the Federal Reserve. Leaders in the crypto industry also expressed support for his return.
The next SEC chairman may offer favorable solutions to cryptocurrency exchanges, with a lawyer viewed as a 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 uncertainty.
"As long as there are no fraud allegations involved, 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.
Dismissing lawsuits would mean the end of 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 that were sold to the public without restriction. Trump had a critical stance on cryptocurrency during his early term, stating that its value was "baseless."
At the end of Trump's first term, the SEC filed a lawsuit against Ripple Labs, which sold $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, 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 reached dozens of settlements with smaller market participants but did not prevent 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. 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 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 chose to settle with the SEC, large exchanges believe this is not a viable option. For them, settling under SEC's terms would mean failure. Take Coinbase for example; it would have to delist many traded digital currencies and stop offering additional services like staking. Staking is a way for traders to earn extra 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 over 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 depart next month, and some of the SEC's legal arguments have been accepted in the early 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 issuance."
Other judges have expressed reservations about this.
This summer, U.S. District Judge Amy Berman Jackson in Washington, D.C. dismissed some of the SEC's charges against Binance, stating: "The agency's decision to regulate this multi-billion dollar industry through litigation—case by case, token by token, courtroom by courtroom—may not be an effective way and could lead to inconsistent results."
Some experts say the SEC has 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, said: "This is not the right approach."
In a speech in November, Gensler stated that he was merely continuing the strategy adopted by the former SEC chair Jay Clayton during Trump's first administration.
Others believe that Gensler has no choice but to use enforcement to crack down on crypto companies he believes are violating securities laws. Marc Fagel, former head of the SEC's San Francisco office, stated that if he chose to provide new industry regulations, companies would likely challenge them, and both sides would end up in court.
Fagel said: "Any rules that are not 100% accepted by the crypto industry will be drowned in litigation."