BTC may be the only safe cryptocurrency after SEC sues Binance/Coinbase

The sudden lawsuit filed by the U.S. Securities and Exchange Commission (SEC) against Coinbase and Binance has caused a stir and may set a precedent and ultimately provide regulatory guidance for the crypto industry over the next decade and beyond. This article will analyze the lawsuit and its basis, possible outcomes, and how different cryptocurrencies will be affected.

Since Gary Gensler was sworn in as SEC Chairman in 2021, the industry has been predicting stricter cryptocurrency regulation. Gensler mentioned when he was a blockchain professor at MIT that many cryptocurrencies are likely securities, which means they should be regulated by the SEC and subject to the jurisdiction of the U.S. government. The SEC has already taken enforcement actions against a number of industry companies and projects, such as Ripple Labs, LBRY, Kraken, etc. Now, it seems likely that the SEC will first "practice" with smaller companies before taking action against the two largest and most famous exchanges.

The SEC alleges in its lawsuit that Coinbase acts as an unregistered exchange as well as a broker and clearinghouse, meaning it not only provides a medium of exchange but also liquidity and middleman services, creating a potential conflict of interest.

On the other hand, Binance faces more charges due to its independent Binance US exchange. The SEC said that Binance founder Changpeng Zhao had enormous control over Binance US and used it to list BNB, knowing that BNB was likely a security, and tried to deceive VIP users into entering the regular Binance exchange.

Both companies face charges related to listing unregistered securities. The SEC classified 19 tokens as securities, including high-market-cap coins such as BNB, Cosmos’ ATOM, Solana, Algorand, Cardano, Polygon, and Filecoin. Even Binance’s stablecoin BUSD was labeled a security, but strangely, Coinbase-backed stablecoin USDC was left unscathed.

As shown in the image below, the SEC may have simply taken a screenshot of the “Tradable” page on Coinbase and selected the top assets, which would explain why ATOM was named in Binance’s lawsuit but not Coinbase, even though both trade ATOM. This shows a lack of understanding on the part of the SEC and could be a good sign for Coinbase’s fate.

The outcome of the lawsuit will change the cryptocurrency industry forever. If the SEC wins, it will have greater control over exchanges and cryptocurrencies that may be securities. Of the two, Binance is more likely to lose because of the listing of platform coin BNB and the involvement of Zhao Changpeng and the evidence. In addition, the SEC has applied to freeze the assets of Binance US, a move they have not taken against Coinbase.

If the SEC wins its case on the grounds that listed cryptocurrencies are securities, it will fundamentally change how the cryptocurrency industry operates. For smart contract protocols like Polygon and Solana, labeling them securities raises many questions, such as how users must document what they use to pay transaction fees, the legal status of validators, and whether any DeFi applications are legally authorized to exist. These labels are arguably more destructive to the long-term health of the industry than the Binance shutdown, and require new classifications for these types of assets.

If the SEC loses the case (which is unlikely given the allegations and the amount of evidence), the cryptocurrency industry will be in a stronger position than ever before. Relaxed regulation will give companies more opportunities to take risks and provide unique services, and cryptocurrencies will be safe to continue to exist.

Given all the above information, the only cryptocurrency that is guaranteed to be safe is Bitcoin, as it has been declared a non-security. Gensler has been trying to classify Ethereum as a security, but the two lawsuits do not list ETH, which means that the SEC is either waiting for the case to form a stronger legal argument against it, or they can't find a basis. Either way, ETH is safe now, but it doesn't mean it will always be safe.

Both lawsuits may take years to resolve, and many questions cannot be answered now. Although some kind of cryptocurrency regulation was expected during Gensler's tenure, it unfortunately came in the form of accusations and lawsuits rather than collaborative and innovation-friendly solutions. Only time will tell how this event will change Web3, but one thing is certain: the outcome of this case will not affect blockchain's promise to create a more decentralized, transparent, and censorship-resistant Internet.