The crypto industry, already grappling with the challenges of a crypto winter received a jolt when the US Securities and Exchange Commission (SEC) filed lawsuits against Binance and Coinbase, two of the largest exchanges worldwide. The SEC had been telegraphing its intentions to crypto exchanges for offering unregistered securities. The simultaneous lawsuit against the largest crypto operators is being seen as a sign that the regulator is going after crypto with all guns blazing.
To be more specific, Binance has been charged with violating securities laws as it allows its customers in the US to trade on its platform despite crypto’s status as a security being uncertain. Coinbase has been charged with operating in the US securities market as an ‘unregulated securities exchange’.
Let’s take a walk down the memory lane to see where it all started. Crypto’s explosive growth in recent years which started in 2020, drew the attention of regulators worldwide. American President Joe Biden wanted the risks and challenges of crypto to be identified amidst its popularity. This prompted the SEC to take a closer look at digital assets but what followed was that instead of the anticipated regulations that the ecosystem had hoped for, crypto was treated the same way as traditional financial assets as a step towards regulating it.
As a result, the Howey test which determines whether an asset is a security or not was applied to crypto, thus implying that deriving profits with money invested in common enterprises is what qualifies crypto as security in the US. Factors such as crypto’s utility, application, and development of products based on blockchain, were not taken into consideration while formulating the verdicts.
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However, this approach of SEC towards crypto strengthened once the FTX collapsed and the market faced severe consequences last year. Prior to this, Ripple stood as one of the few major players embroiled in a legal battle with the SEC, facing a lawsuit with similar allegations. But as more and more loopholes started to emerge as the bear market set in, the SEC and its peers were left in a difficult position. The collapse of prominent projects such as Grayscale, Voyager, Genesis, BlockFi and especially FTX brought the regulators' legwork under scrutiny. Several customers’ funds were affected and the impact spilt over to the TradFi ecosystem too.
Since then, stricter measures have been implemented to investigate Crypto exchanges and their offerings to US customers. Since neither of the exchanges in question wants to settle the case in the near future, we might see a long-drawn battle in the next few months. While the end results could be more clarity on regulations and classification of digital assets, for now, many centralised exchanges including the ones in the lawsuit will witness a surge in fund withdrawals and a reduction in the value of native tokens if applicable.
According to Coinbase CEO Brian Armstrong, “There is no path to ‘come in and register’ — we tried, repeatedly. Instead of publishing a clear rule book, the SEC has taken a regulation-by-enforcement approach that is harming America. So if we need to avail ourselves of the courts to get clarity, so be it.”
In light of these events, another probable incident to watch out for is how the SEC approaches stablecoins. Recently, it has been a popular asset for investment. The largest stablecoin issuer Tether has been making its prominence felt through global partnerships and collaborations. However, the collapse of the Terra stablecoin is still fresh in the minds of the stakeholders. In 2022, SEC Chief Gary Gensler raised questions about the reserves of Tether and its ability to provide enough liquidity against its holdings. We might foresee a similar predicament for Tether and other stablecoins as we see now for the exchanges.
The only certainty and ray of hope among the crypto community remains Bitcoin, the OG crypto which is decentralised, secure, and beyond the allegations of being a Security token. With the latest rise in the applicability of Bitcoin with the BRC 20 token standard, this might further accelerate the utility of the Bitcoin blockchain and propel its growth amidst all ambiguity in the industry.
Throughout its history, the Crypto industry has encountered numerous battles and hurdles, often facing regulatory challenges and legal disputes. However, it is worth noting that despite these trials, Crypto has consistently demonstrated resilience and has emerged stronger each time. The industry has continuously evolved, adapting to changing landscapes and regulations and innovating to address concerns and improve security.
While the recent lawsuits against Binance, Coinbase may create temporary turbulence, the underlying technology and the widespread adoption of cryptocurrencies signal a promising future. With each challenge, the crypto industry has proven its ability to overcome obstacles and grow more robust, paving the way for a maturing and sustainable ecosystem in the years to come.
(The author is the Vice President of crypto investment platform WazirX)
Disclaimer: The opinions, beliefs, and views expressed by the various authors and forum participants on this website are personal. Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. Cryptocurrency is not a legal tender and is subject to market risks. Readers are advised to seek expert advice and read offer document(s) along with related important literature on the subject carefully before making any kind of investment whatsoever. Cryptocurrency market predictions are speculative and any investment made shall be at the sole cost and risk of the readers.