This article was published on the headlines of The Paper on June 21
The U.S. Securities and Exchange Commission (SEC) has not provided a roadmap for the registration of crypto companies, and has not told these companies how to register in accordance with the law. It is like requiring practitioners to enter the door without telling them where the door is. The SEC is deliberately turning crypto practitioners into wandering ghosts who cannot find the door.
The U.S. House of Representatives Financial Services and Agriculture Committees jointly released a draft bill on the structure of the digital asset market. If the relevant solutions proposed in the draft can be implemented, it will be able to effectively limit the power of the SEC.
The U.S. Securities and Exchange Commission (SEC) seems to be trying to "kill" the U.S. crypto industry. On June 5, the SEC sued Binance, the world's largest digital currency exchange, and Binance's CEO Zhao Changpeng, and then filed a lawsuit against Coinbase, the largest exchange in the United States. In an interview after the lawsuit against Binance, SEC Chairman Gary Gensler said, "We don't need more digital currencies" because currencies such as the U.S. dollar and the Japanese yen have already been digitized.
In terms of the intensity of the crackdown on the industry, although the accusation is on the surface against exchanges, the accusation that cryptocurrencies are "unregistered securities" also involves far more entities than just Binance and Coinbase. In terms of the breadth of the crackdown, in addition to "Binance US", the lawsuit also targets "Binance International" and Zhao Changpeng who is outside the United States, which proves that the SEC wants to extend its regulatory scope beyond the United States and implement long-arm jurisdiction.
These actions naturally triggered protests from the industry, and the legislature also responded. On June 13, U.S. House of Representatives member Warren Davidson announced the submission of the "Securities and Exchange Commission Stability Act", calling for the reorganization of the committee and the dismissal of Gensler. The bill was supported by the third-ranking figure in the House of Representatives, Representative Tom Emmer. On the same day, Republican Representative Patrick McHenry, Chairman of the U.S. House Financial Services Committee, wrote to the SEC, arguing that the SEC exceeded its statutory authority, ran counter to its mission of protecting investors and promoting capital development, and was hostile to new technologies.
Although there are checks and balances between US regulations, for a relatively new industry like crypto, the lack of US laws and insufficient judicial precedents leaves the SEC with a lot of discretion, allowing it to threaten the survival of the entire industry. The current limit that Congress can do is to send a letter of protest and propose the removal of the SEC chairman. This status quo cannot be changed before regulatory laws are introduced.
However, radical behavior will inevitably lead to backlash from all parties, and we can still see the direction of development of some events from some recent developments.
America’s Long War on Encryption
The SEC lawsuit had a huge impact. Many people asked questions like "Is the US crypto industry over?" However, as the days went by, the initial shock eased emotionally, and the trend of a protracted war gradually emerged.
First, the SEC intends to maximize the impact of its enforcement activities.
The SEC's announcements of lawsuits against Binance and Coinbase were issued consecutively within two days. These two lawsuits are "long-awaited" by people in the industry and are not surprising. On the one hand, the SEC's investigations into Binance and Coinbase have lasted for a long time, and the investigation reports on the two institutions are more than 100 pages long, which shows that the SEC has invested a lot of manpower and material resources in the investigation. On the other hand, the two institutions have long been targeted by regulators. The Commodities and Futures Trading Commission (CFTC) and the New York Attorney General have previously filed lawsuits against Binance, and the SEC has also previously issued a "Wells Notice" to Coinbase.
It can be seen that the SEC's investigation into the two institutions has matured, and the lawsuit has long been imminent. Binance and Coinbase are the two most symbolic exchanges in the crypto industry. Binance occupies the largest trading share in the industry, and Coinbase is the only compliant exchange in the United States registered in accordance with formal legal procedures. They are the entry point for most crypto activity participants in the United States and control a large part of the liquidity in the market. The simultaneous prosecution of these two companies must be a huge shock to the crypto industry. The SEC is well aware of the influence of such operations.
However, these two lawsuits are not the end of cryptocurrency in the United States. There will be a long period of negotiation and compromise.
Although the SEC has a lot of discretion, the penalties this time are basically limited to fines and asset freezes. What really threatens the survival of the industry is the ruling on the status of cryptocurrencies, which is not within the SEC's power to make. Such a ruling must be made by the court in the future, and court trials are protracted and may not have a result for several years. So it is still a long way from the "end of cryptocurrencies".
It is worth noting that although Binance and Coinbase were sued at the same time, there are differences in the contents of the lawsuits against the two companies.
The same allegation is that the SEC believes that both are "unregistered securities exchanges" that operate "unregistered trading" token trading pairs. Both are also accused of providing unregistered securities in collateral issuance. The difference is that in the Coinbase case, the allegations basically stop there. Binance also faces other charges such as fraud, illegal use of customer assets, and insider trading.
Among the common points, both companies face charges of trading "unregistered securities", which is a core issue concerning the survival of the crypto industry and the reason why this crypto war is bound to be a protracted battle.
How to define the dozen or so digital currencies listed by the SEC? If these digital currencies are defined as securities, then all the companies and currencies involved will be deemed illegal. Because according to US law, these companies must register with the SEC before operating, but the reality is that the SEC has not provided a roadmap for the registration of crypto companies, and has not told these companies how to register according to the law. It is like requiring practitioners to enter the door without telling them where the door is. The SEC is deliberately turning crypto practitioners into lonely ghosts who can't find the door. So under the current situation, if these currencies are clearly defined as securities by law, then cryptocurrencies will inevitably lose their legal status in the United States, and may also be subject to the long-arm jurisdiction of the SEC worldwide.
How to define cryptocurrency is an unsolved problem in the U.S. judicial system. The chairman of the SEC believes that all cryptocurrencies except Bitcoin are securities, but the core basis for his determination of securities is the Securities Act of 1933, which is obviously not applicable to newly emerging digital currencies. The U.S. courts lack precedents on the definition of digital currencies. The fastest precedent may be the result of "U.S. Securities and Exchange Commission vs. Ripple XRP", and this case will not be settled in the short term. Congress should be the authority to define cryptocurrency, but the prospects for related legislation are even more uncertain, and the authoritative definition of cryptocurrency will be absent in the short term.
It is unrealistic to rely on the SEC alone to end all this. Although its law enforcement activities are radical, it can be seen from recent activities that it lacks sufficient resources to defeat each crypto company one by one. In recent years, the SEC has publicly declared dozens of cryptocurrencies as "securities", but only one has been actually prosecuted. In order to use limited resources to attack a wider range of targets, it has two strategies. The first is to create a demonstration effect by attacking the leading companies. This time, the law enforcement against Binance and Coinbase is like this. Since the leading exchanges are unable to appeal, the bargaining power of small exchanges is even smaller and they can only pay fines in a low-key manner. The second is to cover more targets through joint attacks. In this lawsuit against Binance and Coinbase, more than a dozen cryptocurrencies were jointly determined to be "unregistered securities". These crypto companies are objectively also related to the lawsuit, but because they are not the subjects of the lawsuit, they have no chance to come forward to defend themselves individually, and most of them can only acquiesce to the result.
Regulatory trends under the system of checks and balances
The SEC has fully utilized its power in its regulatory activities. Such power-maximizing behavior may stimulate changes and games among the administrative, judicial and legislative systems in the future.
From the perspective of the administrative system, there are two points worth noting.
One is the attitude of the next president towards encryption. Many practitioners have given up their illusions about the current Biden administration and are looking forward to the next administration. Encryption has penetrated into the US political agenda and has been involved in party disputes. One piece of evidence is that encryption has been involved in the 2024 presidential election as a topic very early. For example, Florida Governor Ron DeSantis has used encryption regulation as a weapon to attack the Biden administration's dereliction of duty.
As a new force, DeSantis announced his candidacy for the 2024 presidential election through a Twitter Space (similar to an online chat room), during which he mentioned, "Obviously this government is outdated in its treatment of Bitcoin... Bitcoin has become a threat to them, and they are eliminating it through regulation."
In addition to DeSantis, several other candidates have also made it clear that they will support encryption. For example, pharmaceutical company founder Vivek Ramaswamy wrote on social media in mid-May: "Bitcoin should not be regulated as a security." At the Bitcoin 2023 conference, he announced his willingness to accept Bitcoin campaign donations; Robert F. Kennedy Jr. was the first presidential candidate to accept Bitcoin as a campaign donation. In a speech at the Bitcoin 2023 conference in early May, he said that "encryption technology is a major innovation engine" and called Bitcoin a "symbol of democracy and freedom." However, the latter two are unlikely to win the nomination.
The second is the term of SEC Chairman Gensler. The term of office of the SEC is normally four to six years. Gensler will take office in February 2021 and can normally work in this position until after 2025. However, it is rumored that insiders in Washington know that Gensler has no intention of working in this position for a long time, and his next goal is to be the Secretary of the Treasury. Gensler is likely to seek a new position with the next government change. The lawsuits he has recently initiated are bound to be protracted, but judging from his willingness to serve, he is only interested in being the initiator of the incident, and has no intention of being the solver of the case.
Looking at the judicial system, the Supreme Court last month curtailed the Environmental Protection Agency’s (EPA) power to enforce regulations against landowners under the Clean Water Act. Conservatives who now control the courts believe that executive power is too great, and the EPA is just the first regulatory agency to be weakened. A larger attack on executive agencies is coming, and the SEC’s high-profile enforcement actions make it the next target.
From the perspective of the legislative system, congressional Republicans are currently the only force that could potentially check Gensler, especially as Republicans in the House of Representatives are seeking to limit the SEC's power through legislation.
On June 2, the House Financial Services and Agriculture Committees, chaired by Republican Congressman McHenry and Republican Congressman Glenn Thompson, respectively, jointly released a draft bill on the structure of the digital asset market. The draft bill is designed to propose solutions to two current thorny issues. If the relevant solutions can be implemented, they will be able to effectively limit the power of the SEC.
The first is the definition rules of cryptocurrency and the power boundaries of regulatory agencies (mainly the boundaries between the U.S. Securities and Exchange Commission and the Commodity and Futures Trading Commission). The draft does not explicitly define cryptocurrency as securities or commodities. It establishes a framework to clarify rules and processes so that the U.S. Securities and Exchange Commission and the Commodity and Futures Trading Commission can give definitions according to their different roles. The core of the definition is whether the relevant crypto assets meet the standard of "decentralization", that is, "no one has unilaterally the right to 'control or substantially change' the function or operation of the network in the past 12 months, and the number of digital assets owned by the token issuer is less than 20%." If the U.S. Securities and Exchange Commission can prove that the relevant assets do not meet the "decentralization" standard, the relevant assets will be classified as "securities" and will be under the jurisdiction of the U.S. Securities and Exchange Commission. Otherwise, the relevant assets are "commodities" and will be managed by the Commodity and Futures Trading Commission. In this way, the two institutions have a preliminary regulatory boundary.
The second is the issue of compliance registration of cryptocurrency companies. This is also the core issue of the industry's condemnation of Gensler. The draft proposes a concept - "Alternative Trading System" (ATS), which actually lists a separate category for cryptocurrency exchanges to solve the current classification difficulties. "Alternative Trading Systems" are more relaxed in terms of supervision than traditional stock exchanges. According to the draft, the SEC cannot prevent cryptocurrency exchanges from registering with "Alternative Trading Systems", and should allow "Alternative Trading Systems" to provide digital goods and stablecoin trading pairs, and also allow crypto brokers and traders to keep digital assets if they meet the conditions.
There are several aspects of this bill that deserve attention:
First, this bill is unique in that it combines two committees, which is very rare in Congress. It is rare for two committees to cooperate in congressional legislation because it will involve too many parties, making the already complicated legislative process even more complicated. However, this legislation also requires the cooperation of the two committees because this bill involves areas under the jurisdiction of the two committees. Only when the two committees cooperate can a viable regulatory framework be achieved. The bill balances the power between the SEC and the CFTC. First, it gives the SEC a 30-day window to define a cryptocurrency. If the SEC cannot respond in time, the power is handed over to the CFTC.
Second, this may be the most likely bill to pass among the crypto-related bills in this Congress. There are two reasons for this. First, Republican Congressman McHenry takes this bill very seriously. He is the chairman of the House Financial Services Committee and has just played an important role as the main representative of the Republican Party in the negotiations to avoid a debt default by the Biden administration. He played a leading role in the research and compilation of this bill and invested a lot of political resources to unite Republican members of the two House committees. Second, the joint introduction of the bill by Republican members of the two committees itself represents the investment of Republicans in the bill, and political investment is an important driving force for the passage of the bill.
Third, although the House Republicans have made a big bet on this, it is difficult for the bill to be passed in the short term. The first uncertainty is the Democrats in the House of Representatives. In order to pass the bill, Republicans need the support of some Democratic leaders and the votes of more Democratic members, which is not easy to see from the current situation. The attitudes of several Democratic leaders on this market structure bill are not very clear. Maxine Waters, Vice Chairman of the House Financial Services Committee and Democratic Congressman, has a positive attitude towards crypto regulation and has been committed to the legislation of stablecoins, but her attitude towards SEC regulation has always been "no legislation is needed." David Scott, a Democratic member of the House of Representatives, is also a figure worth paying attention to. He has served on both the Financial Services Committee and the Agriculture Committee. He is now in his tenth term in Congress and is a senior member. He seems to be someone who can work with Republicans on crypto issues. In addition, more Democrats will still be limited by party boundaries. Their enthusiasm for participation depends not only on their own views on the issue, but also on the extent to which crypto will become a battlefield for party disputes. The second uncertainty is the Senate. Even if the bill passes the House of Representatives smoothly, it will face the Senate Banking Committee and the Agriculture Committee after it reaches the Senate. The Senate Banking Committee is one of the hardest hit areas of party disputes in the Senate. This committee has not passed any bill in four years. No matter how the structure of the committee changes, neither the Republicans nor the Democrats have successfully promoted legislation. In addition, there is Senator Elizabeth Warren, a leading figure against encryption, on the Senate Banking Committee. This makes the Agriculture Committee very important. Only if the relevant bill has a breakthrough in the Agriculture Committee can the Banking Committee take action. The third uncertainty is the aging of members of Congress. As a new thing, young members are relatively receptive to encryption, while older members generally have a negative attitude towards encryption because they know less about encryption. If it is to express support for encryption, several young members can organize a relatively strong force. If it is to pass a bill, it is a completely different matter. It needs to get the approval votes of the majority of members of Congress, which involves the attitudes of a large number of older members. The attitudes of these members also depend on the publicity and explanation of the encryption issue by the relevant personnel.
(Author Curiousjoe is a cross-border researcher of international politics and cryptocurrency.)
