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It’s been an eventful week, to say the least, when it comes to the regulatory framework for cryptocurrencies in the US. It’s also clearly what’s been moving the markets, with cryptocurrencies showing little correlation with traditional stock market indexes. This theme will obviously be central to our communication this week.
It all kicked off on Monday as the US Securities and Exchange Commission sued Binance, the world’s largest cryptocurrency exchange platform, with 13 counts. The SEC accuses Binance and its CEO Changpeng ‘CZ’ Zhao of violating US securities rules, including offering and selling unregistered crypto assets, failing to restrict US investors’ access to Binance.com and operating as an unregistered exchange, broker and clearing agency. The SEC’s court filing also accuses Binance and its CEO of completely ignoring federal securities laws, enriching themselves to the tune of billions of dollars while putting investors’ assets at risk.
The SEC claims that Binance and Zhao misused and commingled customer funds, even allegedly diverting them to a Zhao-controlled trading entity called Sigma Chain. Zhao and Binance are accused of having set up a “vast network of deceit”. Binance is facing increasing controversy, with US regulators pursuing it and launching several investigations into the company. In addition to the SEC, the Commodity Futures Trading Commission, the Internal Revenue Service and the Department of Justice are investigating the platform. Last April, a billion-dollar civil suit was filed against Binance and Zhao, accusing them of promoting unregistered securities with the help of celebrities.
If some doubted that the SEC was currently seeking to completely stifle the US cryptocurrency industry, they no doubt changed their minds the very next day. Coinbase, the largest US platform, is also the subject of an SEC complaint, accusing it of failing to register as an exchange, despite offering these services. The SEC further alleges that Coinbase offered and sold unregistered securities through its staking service. The commission also claims that Coinbase has put into circulation crypto assets that are offered and sold as investment contracts, and therefore as securities. The legal action comes after a long-running dispute between Coinbase and the SEC, the former having already filed a lawsuit against the SEC in April to demand regulatory clarification on cryptocurrencies.
The company’s General Counsel, Paul Grewal, urged Congress to pass a bill proposing a regulatory framework for cryptocurrency transactions. Grewal called the SEC’s action “disappointing, but not surprising”, criticizing its approach based solely on the application of sanctions, and argued in favor of establishing clearer rules for the cryptocurrency industry via the bill. This, in fact, is what is currently most decried. Rather than establishing a clear and fair regulatory framework, the SEC is instead seeking to stifle the industry with lawsuits. According to Grewal, the solution lies in legislation that establishes fair and transparent rules, applied equally, rather than resorting to legal action. Despite the complaint, he said Coinbase would continue to operate as usual. He said the bill, called the “Digital Asset Market Structure Discussion Draft”, was a significant step forward in clarifying regulation and urged Congress to pass it quickly.
The bill clarifies the conditions under which a digital asset would be regulated as a security or commodity, establishing each regulator’s jurisdiction. It also defines when a network can be considered decentralized, an important clarification that would determine whether an issuer falls under the jurisdiction of the SEC or the CFTC. Following the announcement of the SEC’s complaint, Coinbase’s shares on the NASDAQ fell by over 21% to $45.98 before slowly recovering in value. At the time of writing, the stock is trading at $53.20.
In return, the U.S. Court of Appeals for the Third Circuit has given the SEC a week to clarify its position on a request made by Coinbase. Judge Cheryl Ann Krause ordered the SEC to reveal whether it has decided to reject Coinbase’s application, and if not, how much time it needs to decide whether to accept or reject the application. Recall that Coinbase filed a public petition with the SEC in July 2022, asking the Commission to clarify its rules on which assets should be considered securities and how to regulate natively digital securities. In April 2023, after the SEC issued a warning to the exchange that the company’s staking products constituted unregistered securities, the exchange responded by filing an action under the Administrative Procedure Act in an effort to force the Commission to respond to its request.
Gary Gensler, SEC chairman, persists in his skepticism of cryptocurrency exchanges, stating that their business model is “based on non-compliance”. During an interview on CNBC, Gensler asserted that the world doesn’t need more digital currencies, pointing out that currencies such as the US dollar, euro and yen are already digital. He also criticized cryptocurrency exchanges for mixing different functions, which would not be acceptable in traditional finance. Since Gensler took over as head of the SEC, the agency has stepped up its action against the cryptocurrency industry. However, these measures have worried some lawmakers, mainly Republicans, who fear that stricter rules and an apparent lack of clarity will stifle innovation.
With its latest lawsuits against Binance and Coinbase, the SEC now qualifies at least 67 cryptocurrencies as securities, representing over $100 billion worth of tokens on the market. In its recent lawsuit against Binance, the SEC introduced 10 cryptocurrencies into the securities classification: BNB, Binance USD, Solana, Cardano, Polygon, Cosmos, The Sandbox, Decentraland, Axie Infinity and COTI. The Coinbase lawsuit adds six more: Chiliz, Flow, Internet Computer, Near, Voyager Token and Nexo. This adds to a long list that includes Ripple and Algorand.
Cryptocurrency industry professionals have widely criticized this approach. Kristin Smith, CEO of the Blockchain Association, has deemed the SEC’s approach unacceptable, accusing the agency of attempting to bypass formal rulemaking processes and deny public engagement. Key industry players, including Paolo Ardoino, CTO of Tether, and Ted Shao, CEO of Turbos Finance, expressed concern, claiming that uncertainty around regulations in the US could drive cryptocurrency companies to seek more welcoming jurisdictions. Furthermore, Will Paige, analyst at Insider Intelligence, said that the SEC’s actions could erode US consumers’ already fragile confidence in cryptocurrencies. Finally, some industry figures question whether the SEC’s motives are really focused on investor protection. David Schwed, COO of Halborn, for example, has suggested that SEC Chairman Gary Gensler’s personal ambitions may outweigh his core mandate.
Binance is also facing difficulties in Canada. The Ontario Securities Commission launched an investigation into Binance last month to determine whether it had attempted to circumvent securities laws. Shortly after this investigation began, Binance announced its departure from the country, citing new guidelines relating to stablecoins and investor limits. The exchange then asked the Securities Commission to end the investigations, calling them extremely broad and launched without any real factual basis.
While the markets reacted strongly to the Binance lawsuit on Monday, they immediately rebounded yesterday in parallel to the Coinbase lawsuit, erasing virtually all the previous day’s fall. The rebound wiped out the losses incurred following a record liquidation on Monday, in which over $293 million worth of token-linked futures products were liquidated.
While the SEC seeks to categorize many cryptocurrencies as financial securities, market players seem to perceive them more as commodities. One notable phenomenon is the gradual detachment of Bitcoin and Ether from the industry organizations themselves. Their trajectory, distinct from that of Coinbase’s share price, for example, is more akin to the behavior of physical commodities. To give a concrete example, the price of oil wouldn’t fall drastically if the SEC decided to sue ExxonMobil. It seems that Bitcoin, Ether and other cryptocurrencies follow a similar logic: their value does not fluctuate directly in line with news specific to certain entities in the crypto sector. This trend suggests that market players are prepared to continue assigning value to these cryptocurrencies, even in the event of increased regulation on exchange platforms. This dynamic could even reinforce the perceived value of digital assets for investors, highlighting their decentralized nature and resilience.
“The fact that the SEC nowhere mentioned bitcoin in its complaints against Binance and Coinbase also underscores the SEC’s previously expressed position that bitcoin is not a security and therefore outside the agency’s jurisdiction,” said Alex Adelman, CEO of bitcoin rewards app Lolli. “The agency’s enforcement actions against certain tokens as unregistered securities may continue to work in bitcoin’s favor, as investors increasingly shift their capital to bitcoin as a fundamentally safe, sound and independent store of value,” said Adelman.
The rebound also saw bitcoin retest the 200-week moving average after losing it the previous day, which remains crucial technically speaking. Will this week’s action be able to reassure investors and create traction for a bullish continuation?
Rivemont Investments, manager of the Rivemont Crypto Fund.
The presented information is as of June 7th, 2023, unless otherwise indicated and is provided for information purposes only. The information comes from sources that we believe are reliable, but not guaranteed. This statement does not provide financial, legal or tax advice. Rivemont Investments are not responsible for any errors or omissions in the information or for any loss or damage suffered.
