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Govind Tekale

Lawsuits against Coinbase and Binance test the fate of US Crypto Markets

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The SEC filed a lawsuit against Coinbase for not registering as a broker, exchange, or clearinghouse of securities. As a result of the lawsuit, Coinbase’s share price dropped by a fifth when markets opened.
The day before the SEC sued Coinbase, it also sued Binance, the world’s largest crypto exchange, alleging that it offered securities-trading services without the necessary registrations and placed customer funds in a trading outfit owned by its CEO, Changpeng Zhao. Binance rejected all the allegations and expressed its intent to vigorously defend itself.

The core issue in both lawsuits is the classification of cryptocurrencies as securities. American law defines securities to include any “investment contract” that generates returns based on the efforts of a promoter. The SEC has suggested that bitcoin, the most valuable cryptocurrency, does not meet the standard of an investment contract, but its stance on other cryptocurrencies like ether remains unclear. Gary Gensler, the SEC chairman, has indicated that he believes most other cryptocurrencies do qualify as securities. The lawsuits against Coinbase and Binance place the fate of the US crypto industry in the hands of the judiciary, as there is currently no clear legislation or regulatory framework for cryptocurrencies. Issuance of crypto tokens by an entity shares similarities with the issuance of equity shares, as the value of tokens can increase based on the performance of the organization. However, some cryptocurrencies like bitcoin do not have a centralized promoter that stands to profit from their growth.

Other cryptocurrencies, such as certain stablecoins, are primarily used for liquidity purposes within crypto protocols rather than as investments. US financial regulators have struggled to determine the regulatory classification of cryptocurrencies for years, leading to uncertainty and disagreements among agencies. Gary Gensler, the chair of the SEC, has launched a crackdown on crypto exchanges to establish regulatory clarity. The SEC’s actions against Coinbase and Binance are aimed at protecting investors and the integrity of US securities markets. By declaring Coinbase an illegal exchange, Gensler makes it more challenging for US crypto traders to trade digital tokens. Coinbase is listed in the US, while Binance, without a formal headquarters, presents a more complex case as it separated American operations from international ones. The exchanges argue that the SEC’s approach lacks clear guidelines, and they are being regulated through enforcement rather than proactive regulation. The outcome of the SEC’s actions has two significant implications for the crypto industry in America.

If the SEC wins the lawsuits, the US could effectively join the list of countries that have either fully or partially banned cryptocurrencies. Even if a regulatory path is created for crypto firms to operate within the law, the increased regulatory burden will likely shrink the value of cryptocurrencies. The second implication is that more crypto firms may relocate to jurisdictions with friendlier regulations and avoid conducting business in the US. Dubai is positioning itself as a potential winner in attracting crypto firms, as it has set up a specialized crypto regulator and welcomed offices of major crypto exchanges.
The game of regulatory cat-and-mouse between regulators and crypto firms is ongoing. The lawsuit against Binance accuses the company of allowing Americans to improperly open accounts and trade, while avoiding regulatory rules.

The SEC’s actions against Coinbase and Binance do not directly address the question of whether cryptocurrencies are securities or commodities. Ripple, the tech payment and exchange company, is involved in a lawsuit with the SEC that may determine the SEC’s jurisdiction over crypto. The SEC sued Ripple, alleging that its XRP token is a security, and Ripple is aggressively defending itself against the lawsuit. A ruling on the Ripple case is expected later this year. The SEC contends that a dozen or more tokens offered on Coinbase are also securities. Coinbase argues that the SEC’s enforcement-only approach is hurting America’s economic competitiveness and calls for clear guidance on virtual currencies. Analysts believe that despite the negative impact on Coinbase, the legal actions may lead to clearer regulations for the crypto industry. Gary Gensler has expressed his skepticism about digital currencies and emphasized that the US dollar and other existing currencies already serve as digital forms of money and investments.

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