Binance and Coinbase: What’s Next, Experts Explain

The U.S. Securities and Exchange Commission ( SEC ) has struck Binance and Coinbase with its iron fist, and the Coinbase lawsuit, which has tens of thousands of U.S. users, could spur Congress to take action on cryptocurrency regulation. More serious charges against Binance could bring down one of the most profitable businesses of the 21st century so far. Can the SEC win? Will Binance shut down in the U.S.? What will Congress do? As the SEC takes action against the biggest players in the crypto industry, Coindesk interviewed some legal institutions and crypto veterans to better understand where the cases are headed and what they mean for the future of the industry.

Is there reason for the company to be optimistic about these lawsuits?

Attorney Brian Frye: Maybe. I'm not optimistic about the SEC's complaint against Binance. It 's brutal. Binance basically acquiesced to everything the SEC accused them of. It's a disaster.

I think Coinbase is in a much better position. It has been trying to comply with the SEC for some time, and the SEC refuses to even engage in Coinbase's good faith efforts at compliance, which doesn't look good, and I think at least some courts might disagree with that argument. Courts expect institutions to act in a predictable manner. Coinbase keeps asking the SEC what it wants, and it keeps refusing to respond. This might make Coinbase look like the good guy and the SEC look like the bad guy.

Furthermore, I think the SEC still hasn't provided a coherent explanation of what it wants to regulate, what it believes it has the authority to regulate, why it wants to regulate, how it wants to regulate. If the SEC wants the authority to regulate, it's a security.

There is also the issue that institutions have to be credible, and the SEC has a credibility problem. It is regulating through enforcement, which will cause a lot of pain to crypto companies in the short term, and it has to think about the longer term.

The SEC recently got hammered by the courts for overstepping its authority with respect to ALJs [Administrative Law Judges]. I wouldn’t be surprised if the courts take a hard look at its approach to crypto assets, especially for businesses that have tried to comply but were rejected by the agency.

Attorney Mike Selig: Litigation is not entirely a bad thing for the crypto industry. Against the backdrop of these lawsuits, foreign jurisdictions are adopting crypto laws and regulations, and U.S. lawmakers are debating crypto market structure legislation in Congress. Every time the SEC sues another crypto business, the political pressure on U.S. lawmakers to pass sensible crypto legislation becomes greater - especially if the business has been publicly stating that it has been working to comply with applicable laws and regulations.

These lawsuits encourage businesses seeking to comply with clearly applicable rules to leave the U.S. as foreign jurisdictions welcome them with open arms and create a new set of laws and regulations. However, there is reason to be optimistic about lawsuits brought by the SEC, as they can prompt Congress to recognize that the SEC's enforcement approach is not working and comprehensive legislation is needed - otherwise, industry will flee to more permissive jurisdictions.

Kristin Smith , CEO of the Blockchain Association : The SEC's actions this week make the path forward clear - and urgent: Congress must act. Last week, House Financial Services Committee Chairman Patrick McHenry and House Agriculture Committee Chairman Glenn Thompson introduced a discussion draft on digital asset market structure, which is a step toward effective regulation. As countries around the world take action to responsibly regulate crypto, it is critical that the United States remain competitive.

Will Binance or Coinbase change the way they do business in the short term?

Kristin Smith: The SEC doesn’t make the law—it only makes charges. Enforcement actions are simply the regulator’s opinion—and the courts will decide if its interpretation of the law is correct. Unless the SEC wins, it’s business as usual.

Does the SEC's lawsuit against Binance and Coinbase mean the agency will redefine crypto?

Attorney Brian Frye: Yes and no. I think these lawsuits illustrate something that I've been saying for a long time, but people just don't want to hear. "Is it a security?" That's not an ontological question. If the SEC wants to regulate it, it's a security. So the real question is what the SEC wants to regulate, why it wants to regulate these things, how companies can comply with the SEC's regulatory goals, and whether any of this makes sense.

Attorney Mike Selig: To quote Battlestar Galactica, “ It’s all happened before and it’s all going to happen again ”. For years, the SEC has been gradually building up legal theories about the proper registration categories for crypto-asset securities and various crypto-asset intermediaries. The Coinbase and Binance lawsuits are the culmination of all that has come before. Neither case offers a ton of new information about how the SEC views cryptocurrencies, but the complaints are worth a read if you want to get a sense of the agency’s perspective on cryptocurrencies.

That said, there are some novel aspects to these complaints. In the case of Coinbase, the SEC asserted for the first time that providing noncustodial digital wallet software is a broker-dealer activity because the wallets can be used to buy and sell purported securities through third-party decentralized applications, for which the software developers receive fees.

In the Binance case, the SEC asserted that BUSD , a U.S. dollar stablecoin issued by a New York limited purpose trust company regulated by the New York State Department of Financial Services, was a security under a new theory—namely that Binance used profits from BUSD sales to provide various yield plans for BUSD holders. In both complaints, the SEC argued that many crypto assets are securities, which it had not previously deemed as securities in its actions against issuers or other secondary participants.

Think long term: What will crypto look like if the SEC wins and Coinbase/Binance loses at the Supreme Court?

Frye: Good question, and it depends on what the SEC wants to achieve. If it wants to destroy cryptocurrencies, it could probably do that if Congress allowed it to. Or at the very least, it could return cryptocurrency regulation to the stage it was in the late 2000s. But I don’t think that’s going to happen. The SEC is conservative and doesn’t like novelty, but it also recognizes that its job is to regulate the market. I think it will eventually realize that it has to take its regulatory role more seriously.

But equally, I am disappointed with the SEC and its response to crypto regulation. I think regulation can be good and effective, but the SEC has not even attempted to promulgate coherent regulations for crypto assets, it has just been rehashing the same old stuff, which is embarrassing, and regulators should be doing some soul-searching, and the public deserves better. Regulators should actually do some real work, fully understand the markets they intend to regulate and explain their rationale for regulation. The SEC has completely failed in this regard, and it is unacceptable.

Selig: The future of cryptocurrency in the United States will likely be determined by Congress rather than the courts. If the SEC prevails in its lawsuits against Coinbase , Binance, Ripple, and others (even all the way to the Supreme Court), we could still see legislation pass Congress that establishes a reasonable regulatory market structure for crypto assets. Coinbase, Binance, and other crypto ecosystem players will eventually have a path to compliance. Every major foreign jurisdiction is moving in this direction, and it is unlikely that the United States will remain the only naysayer.

If you have been or are currently representing a major token that has been designated as a security in any litigation, how would you advise?

Frye: I would advise them to write off the assets and expect to pay a fine, which may be a significant amount.

Selig: Development companies and foundations associated with any of the crypto assets mentioned in the lawsuit may be inclined to intervene to defend the non-security attributes of the crypto assets. These entities should carefully consider the potential risks and benefits of doing so with legal counsel. Developers and users on these networks should likewise consult legal counsel regarding their business activities, but the SEC's conclusion that certain crypto assets are securities is arbitrary and has not yet been supported by judicial decisions on the definition of securities.

Will these cases change the way Congress approaches cryptocurrency regulation?

Frye: I think this is definitely a watershed moment. Ultimately, Congress decides what agencies can do. Congress can pass new legislation, at least in theory. It can encourage the Biden administration to appoint new administrators. It can push back against the way the SEC makes decisions.

Selig: The SEC’s jurisdictional grabbing may backfire. Members of Congress have been keen to expand the Commodity Futures Trading Commission’s ( CFTC ) jurisdiction over crypto assets rather than the SEC, even to the extent that the SEC has contractual authority over any crypto asset associated with a decentralized or functional network. Rather than issuing sensible rules applicable to the crypto asset industry, thereby reducing the need for a comprehensive legislative solution involving the CFTC, the SEC has instead policed ​​and angered the industry through enforcement. As a result, industry participants may favor alternative market regulators.

Is it possible that the current situation could lead to most, if not all, cryptocurrencies being banned, or making them subject to registration and other requirements?

Frye: Yes, but I doubt it. I think it’s more likely that the SEC will make it more difficult to introduce new cryptocurrencies.

Selig: The current situation is unlikely to result in laws or regulations that effectively ban crypto assets within the United States. Legislators and regulators around the world recognize the huge potential of crypto technology and are working to develop a reasonable legal framework for the asset class. The United States is late to the party, but FOMO will join in. Every new investment product from renewable energy credits to credit default swaps will go through a period of regulatory gloom before becoming a properly regulated and verified asset class. Crypto is no exception.

What’s missing from the public discussion about crypto law?

Matt Stoller, antitrust activist: While the courts or Congress can do whatever they want, the hype machine for cryptocurrencies has moved on to AI, which — while it has a lot of hype associated with it — is a useful technology. So the only question for crypto propagandists is, can they provide actual use cases beyond money laundering and speculation?

What message does the lawsuit send to other crypto exchanges? If you are a US crypto exchange, should you be worried?

Frye: Yes. The SEC made it clear that it was taking action, but that was not what the SEC wanted to accomplish, and that was a problem.

Selig: The message from the SEC Enforcement Division is clear: “We generally agree with SEC Chairman Gensler that most crypto assets are securities.” This is evidenced by the fact that the agency now asserts that most of the top ten crypto assets by market cap are securities, notably excluding Bitcoin and Ethereum.

However, the law is not settled, and additional lawsuits will be filed, including the Coinbase and Binance cases. I would be surprised if we see the SEC file more cases related to crypto asset exchanges in the near term. Crypto asset exchanges must continue to evaluate whether each crypto asset is a security based on the unique facts and circumstances associated with each crypto asset.

There are several allegations against Binance that, if true, are damning, including charges of wash trading and practices that put customers at risk (somewhat reminiscent of FTX). Is there reason to worry about the future of centralized exchanges?

Frye: I don't know, but maybe?

Is there a worse SEC chair than Gary Gensler? (Subtext: What could be more destructive to the industry than these two lawsuits?)

Frye: Everyone in crypto complains about Gary Gensler . I’ve criticized his approach to regulation. But what if the SEC was headed by Lina Khan, who heads the Federal Trade Commission (FTC)? Or more realistically, what if Lina Khan decided that the FTC should regulate crypto? I wish you good luck.

Smith: No, unfortunately, it is clear that Chairman Gensler is blatantly ignoring his agency's mission to protect investors. This week alone, the SEC indirectly classified approximately $120 billion worth of crypto assets as securities. Is attempting to eliminate these tokens protecting investors?

Is it possible that the lawsuit could lead to Binance and/or Coinbase shutting down in the U.S.?

Frye: Yes. Based on the complaint, I think this is a very real possibility for Binance, but less likely for Coinbase, which has done everything it can to comply with the SEC's rules and expectations.

What do you think of Gary Gensler's statement that the world does not need digital currency because the dollar, euro and yen are all digital currencies? Why did Gensler make such a statement instead of focusing on his actual responsibilities?

Smith: Gensler appears to have laid out all his cards now: He believes that digital currencies should not exist in the United States. He clearly understands the technology and has been open to exploring its potential in the past. He also understands the business of public companies like Coinbase, the products and services that the SEC has approved, and their financial disclosure obligations. So without more information, it’s hard to speculate what Gensler’s motivations are.