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Back-to-back lawsuits against two of the world's largest crypto firms are chilling the fragile US digital asset ecosystem.
Within 24 hours, the Securities and Exchange Commission filed two scathing complaints against Binance and Coinbase, claiming they operated illegal stock exchanges in the United States. The moves mark a serious escalation in the SEC's campaign to rein in an industry that has operated for years in a regulatory gray area.
Coinbase shares were hammered Tuesday, falling more than 12%, and Binance saw investors withdraw nearly $800 million from its platform in the space of 24 hours.
The lawsuits have paved the way for litigation that could take months or even years to resolve.
In the meantime, many US investors/believers in digital assets are in limbo. The big question: Is there a safe place to trade crypto?
The short answer: Probably not. At least for now.
"A decent rule of thumb," wrote Bloomberg columnist Matt Levine, is that "all cryptocurrency exchanges commit crimes, and if you're lucky, your exchange is just dealing with crimes."
In other words, as far as the SEC - Wall Street's primary regulator - is concerned, just about any crypto exchange operating in the United States is illegal, as the regulator considers virtually all crypto tokens (minus bitcoin, which I will discuss later) as titles. And you can't be in the securities industry without a license.
Of course, Coinbase argues (reasonably) that the SEC already approved its business model when the regulator cleared it to go public in 2021, and the company has tried to work with regulators to ensure it's compliant. to the law.
"There is no path to 'enter and register' - we have tried, many times", tweeted Coinbase CEO Brian Armstrong on Tuesday. "Instead of issuing a clear rulebook, the SEC has taken a rule-by-enforcement approach...So if we have to go to court for clarification, so be it."
The lack of regulatory clarity is a common complaint among crypto firms, who argue that the United States is pushing the industry overseas and ultimately ceding authority to foreign regulators who have established clearer guidelines.
And that may be true, but Gary Gensler, the outspoken crypto-skeptic and top SEC cop, doesn't seem to care.
"Look, we don't need more digital currency," Gensler told CNBC on Tuesday. “We already have a digital currency: it's called the US dollar. It's called the euro or it's called the yen; they are all digital right now. We already have digital investments.
Gensler's message to investors: The SEC is here for you.
“The investing public benefits from US securities laws. Crypto should be no different, and these platforms, these intermediaries, need to come into compliance,” he said.
The SEC's double whammy for civil cases sets the stage for litigation and, ultimately, judicial review that could compel Congress to act.
“Our view continues to be that only Congress can end the political chaos that has surrounded crypto over the past year,” TD Cowen analysts wrote. "That's why this litigation may not be positive for Coinbase, but it should be positive for the crypto space. It should bring crypto closer to the final rules of the road, regardless of how the judge rules. .
In the meantime, US investors need to be very careful about where they trade cryptos, said Reena Aggarwal, director of the Psaros Center for Financial Markets and Policy at Georgetown University. "US regulators are aggressively going after crypto companies, I don't expect that to change."
Bitcoin and Ether futures traded on the Chicago Mercantile Exchange, Aggarwal said, are a safe bet because the exchange is a regulated entity. “There are also bitcoin futures-linked ETFs offered by traditional financial firms.”
Interestingly, bitcoin, the world's first and most popular cryptocurrency, surged on Tuesday despite regulatory crackdowns. This is partly because the SEC considers virtual currency to be a commodity under the jurisdiction of the CFTC.
After falling 6% on Monday, bitcoin rebounded on Tuesday, trading above $27,000 in the afternoon.
Many crypto investors seem to be ditching so-called “alt-coins” and sticking with the relatively more reliable OG virtual currency, wrote Ed Moya, senior market analyst at Oanda.
Conclusion: “The SEC appears to be playing Whac-A-Mole with crypto exchanges,” Moya wrote. For this reason, crypto investors will have to decide if they are confident that offers on various exchanges will remain available for trading.
It's far from a sure thing. Then again, crypto trading – a high-risk activity at the best of times – has always required an iron stomach.
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