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; however, crypto executives refused to comply with financial regulations they deem unsuitable for digital currencies.
On one side is the crackdown led by current chair Gary Gensler, and 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 prevails in court, these victories will force the free market to comply with long-standing institutional rules to protect investors buying securities. However, litigation could take years to resolve, and with Donald Trump potentially returning to office, Gensler may not have time to handle these major cases.
Trump's return to the White House means a new era for cryptocurrencies—government barriers will be reduced.
The president-elect has shed previous skepticism towards cryptocurrencies and pledged support for the digital asset industry, also hoping 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 chair may offer favorable resolutions to cryptocurrency exchanges, as a lawyer seen as a potential successor to Gensler positions himself as a critic of Gensler's litigation. Former SEC General Counsel Robert Stebbins said the agency should suspend most cryptocurrency litigation while clearing a path for these companies to operate without litigation uncertainty.
"As long as fraud charges are not involved, I feel the agency might 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 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 was critical of cryptocurrencies early in his term, stating their value was "baseless."
At the end of Trump's first term, the U.S. Securities and Exchange Commission filed a lawsuit against Ripple Labs, which sold $1.3 billion worth of the cryptocurrency XRP. Last year, the SEC lost in that case, marking a significant setback for the agency in litigation.
The rise of cryptocurrency exchanges in the early days of the Covid pandemic 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 address 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 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 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 choose 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. Take Coinbase, for instance; it would have to delist many of the digital currencies it trades 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 operations into separate companies.
Cryptocurrency companies believe that investment regulations designed for Wall Street do not apply to digital tokens 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 leave next month, and some of the SEC's legal arguments have already 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 are considered securities.
Gensler stated in a recent speech, "Courts across the board are recognizing our actions to protect investors and have dismissed all arguments that the SEC cannot enforce the law when it comes to the issuance of securities—regardless of the form of the securities being issued."
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, courtroom by courtroom—may not be an effective way to do so 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 creating 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 simply continuing the strategy adopted by former SEC Chair Jay Clayton during Trump's first administration.
Others believe Gensler had no choice but to rely on enforcement to crack down on crypto companies he perceives as 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, and ultimately both sides would end up in court.
Fagel said, "Any rules not 100% accepted by the crypto industry will be drowned in litigation."