The Securities and Exchange Commission sued Binance yesterday.
The regulatory organization announced this morning that they are suing Coinbase as well.
These are two of the largest crypto exchanges in the world.
These actions by the SEC are a continuation of the increased regulatory scrutiny that has been underway in the United States over the last 12 months.
Both filings claim that the different crypto exchanges offered unregistered securities within the United States.
Binance specifically is accused of offering the buying/selling of specific assets, among other things.
Coinbase is accused of offering unregistered securities through their Ethereum staking program.
I won’t bore you with all the details here — you can read the specific of each regulatory action regurgitated across the mainstream media.
The ramifications of these two actions is more interesting to discuss in my opinion.
First, it is important to remind everyone that accusations do not confirm guilt.
The United States of America continues to have a rule of law that depends on the judicial process to determine innocence or guilt.
In fact, Americans are believed to be innocent until proven guilty - at least that is the way the system is designed to work.
The courts will ultimately decide who is right and who is wrong in this situation.
We have seen the case laid out from the SEC’s perspective, and certain things definitely don’t look great for the exchanges to the casual observer, but we have yet to see the other side of the story.
As I’ve become older, I have learned to always wait to see both sides of the story before forming an opinion on a situation.
Second, the public narrative around these two companies are quite different. Coinbase is generally thought of as the US-based, regulated exchange that has tried to comply with US regulations at every stage.
Binance has a reputation of having started off as an unregulated exchange outside the United States, but becoming more regulatory compliant in recent years as they entered the US market.
These public narratives may be true or they may not be. The public perception matters in these cases it appears though.
There is the judicial system and then there is the court of public opinion.
Those two things shouldn’t be related, but humans are human and sometimes they are.
Third, each of these cases boils down to what digital assets are considered a security and which ones are not.
This definition has long been pontificated by people across the crypto and digital asset ecosystem. There is disagreement between the various tribes, along with the various legal/non-legal functions, on what constitutes a security.
Although the debate has raged on for years, there has never been a definitive answer.
The SEC has long maintained that majority of the crypto assets are securities. Many crypto market participants believe the opposite. It looks like we are headed to court to figure out the answer.
Whatever the answer ends up being will likely set the precedent for crypto assets in the United States.
Fourth, the crypto market is a global game. The United States is a big part of the market, but it is by no means the only component.
In fact, if the US continues down the path of becoming more abrasive to this technology, it is highly likely that global adoption will continue, and potentially accelerate, in other areas around the world.
In a sense, the US could be pulling themselves out of the game and volunteering to sit on the bench.
We won’t know for years — we have to get the ruling on these cases, have the same answer applied across the industry to different assets, and then wait to see how companies will respond.
Maybe some companies continue to issue assets, and support various use cases, regardless of whether crypto assets are deemed securities or not.
They could just register them with the SEC and continue in the normal course of business.
Other companies may see this as detrimental to their business, so they would either shut down or move off-shore.
As a reminder, Will Clemente wrote in a guest post last week:
“Offshore exchanges remain the dominant venues across the entire crypto landscape, making up a whopping 86% of all trading volume; this dynamic is likely to only accelerate with regulatory uncertainty in the United States.
Even Coinbase, which historically has been recognized as the publicly traded highly regulatory compliant alternative option to other venues in crypto, announced the launch of its own offshore derivatives venue called Coinbase international exchange.
Harsh regulatory efforts and posturing from government officials in the US with the intention of establishing control over the industry are only going to have the opposite effect and drive talent/capital/innovation off-shore and on-chain; ultimately giving the government less control than what it would have if it encouraged activity to take place in the US; allowing it to at least retain some degree of oversight.
For the foreseeable future it’s unclear why the dominance of trading volume in offshore venues won’t continue.”
Lastly, the Coinbase situation appears to have one main difference from the Binance situation.
Coinbase went public in the last two years, but the SEC is alleging that the company has been operating as an unregistered securities exchange within the United States since 2019.
If you hold that assumption to be true, it would mean the SEC approved an unregistered securities exchange to go public in American capital markets.
That will throw a lot of people’s brains in a blender.
Before I let you go, I want to issue you all a word of caution — you are going to read a ton of hot takes over the next few days on these regulatory actions.
People will tell you emphatically that Binance and/or Coinbase are in the right. Others will tell you that the SEC has these cases as slam dunk wins.
Be very careful about what you read and who you believe. I have no clue how either case will play out.
These regulatory issues can get very complex quickly. There are trained lawyers on both sides who will go to court and argue it out. Ultimately, a judge and/or jury will decide who makes the better argument.
I’ve been investing in this industry for almost a decade now. I’ve probably heard every argument on both sides about whether these assets are securities or not. But I have no clue.
The industry needs clarity and it appears that is what we are going to get.
But remember, regulatory clarity doesn’t necessarily mean the industry will get the rules that they want.
