The U.S. Securities and Exchange Commission (SEC) has launched an all-out attack on the exchange industry by suing Binance and Coinbase, the world’s and U.S.’s largest crypto asset (virtual currency) exchanges, respectively. .
The SEC, led by Chairman Gensler, sued Binance on June 5 for 13 counts of serious misconduct. The charges include suspicion that Binance did not sufficiently separate its global and U.S. operations, that it put customers’ assets at risk, and that it made “a deliberate effort to circumvent the law.” is included.
No surprise in lawsuit
Perhaps the most serious allegations are those reminiscent of the illicit ties between Sam Bankman-Fried’s crypto exchange FTX and hedge fund Alameda Research. The SEC alleges that Binance mixed billions of dollars in customer assets through an outside company, Merit Peak Limited, owned by CEO Changpeng Zhao.
The lawsuit against Coinbase, which until recently has built a reputation as a cryptocurrency exchange that operates in a law-abiding manner, is just as grim.
But the SEC lawsuit is no surprise. In March, the Commodity Futures Trading Commission (CFTC) sued Binance for a number of charges, including those repeated in the SEC complaint. Also in the same month, the SEC sent a “Wells notice” to Coinbase informing them that the SEC was moving toward a lawsuit and intended to sue.
The new focus is whether Binance or Coinbase will face more serious criminal charges from the US Department of Justice. Binance has long been rumored and reported that the Department of Justice is considering a lawsuit. But according to Reuters, there appears to be a split within the Justice Department about the next move.
Objections within the SEC
Additionally, there appear to be opponents within the SEC who believe the SEC should have been more focused on providing a path for crypto companies to “enable” the law. Of particular note is Hester Peirce, one of five SEC commissioners. Even if Gensler’s and the SEC’s actions were aimed at protecting investors, he said the result was a sense of uncertainty.
Pierce recently told CoinDesk TV that one way for the SEC to “raise the flag” and establish control over the nascent cryptocurrency industry is through enforcement action. While it’s no surprise that multiple U.S. authorities are conducting “enforcement crackdowns” and waging turf wars with other agencies, there is truth to this claim.
It’s not the first time the SEC and CFTC have targeted the same company, but for an organization that’s always been short of cash, it’s a waste of resources. The battle over which regulator should take the lead, securities or commodities, has been a legislative nightmare and, frankly, a national embarrassment.
The SEC’s function is to set standards that companies must follow. This includes information disclosure rules and protocols to prevent illicit financial abuse (money laundering and terrorist financing). Contrary to many crypto activist misconceptions, the SEC isn’t necessarily tasked with rooting out the bad guys.
But in the form of lawsuits, the SEC and CFTC have the amazing power to show what types of companies and practices are undesirable in a functioning economy. The lawsuits filed against two of the largest companies in the cryptocurrency industry make it clear that all cryptocurrency exchanges are at risk. A little digging in any financial institution will reveal some kind of violation. Even more so in an industry as intense as crypto.
What regulators want
While the SEC lawsuit is a reminder of reality, it is no new evidence that cryptocurrency exchanges in their current form of business are not very welcome in the United States.
For years, Chairman Gensler has argued that existing financial rules apply to crypto-asset service providers, that crypto-assets, unless issued on very specific terms, are similar to securities (various At least 61 tokens have been classified as securities in the lawsuit), arguing that companies operating exchanges are obligated to “visit and register” with the SEC.
There have been numerous reports that cryptocurrency companies have started discussions with the SEC that have ended in failure. There are also some successful examples of the opposite. But the fundamental change the SEC wants is to give crypto companies more information about who is using their platforms and how they are using them.
In other words, oversight and disclosure that has become so commonplace in financial markets, crypto companies wishing to operate in the EU under the recently passed Markets in Crypto-Assets Act (MiCA). is established by law for
“Coinbase’s alleged omissions are the failure to provide investors with vital protections such as rules to prevent fraud and market manipulation, proper disclosure, measures against conflicts of interest, and lack of regular checks. ‘ Gensler tweeted.
Why Rules May Not Work
Certainly such informational rules are culturally unacceptable to the crypto industry (which tends to place great value on financial privacy and autonomy) and, on a technical level, pose risks to crypto users, There are certainly reasons why it is unnecessary. Information disclosure on the blockchain is complete information disclosure, and due to the mechanism of the blockchain, all of the user’s transaction history will be exposed.
More importantly, cryptocurrency networks have built-in customer protection systems, or at least are optimized for a different understanding of “safety” than financial regulators.
What’s really important for crypto is to make this new form of currency unseizureable, to make its transactions irreversible, while at the same time providing equal access to all potential users. The open ledger design ensures that the history is fully viewable and that criminals can be tracked down by authorities should the need arise. In fact, such efforts are now commonplace.
Just because blockchain makes these things possible doesn’t mean regulation is unnecessary. It would be nice to know in advance how entrepreneurs and companies can legally do business. However, the true neutrality and technological achievements of cryptoassets have put them at odds with some regulators.
Conflicts also include the “commodity money” aspect of many tokens used in decentralized systems, with utility beyond speculation. It also includes circuit breakers programmed into the DeFi lending market, pre-established rules that everyone will follow when interacting with smart contracts.
what about the exchange?
However, what is true for purely decentralized systems is not necessarily true for centralized companies such as Coinbase and Binance. The outcome of this lawsuit is difficult to predict and will likely continue for many years, but the scope of the allegation suggests that the SEC intends to completely and irreversibly change the way cryptocurrencies work. It is clear that there are Funds have already flowed out of Binance, which has been struggling with low trading volumes for years before the lawsuit.
Some predict that hostile moves like this one will drive the domestic cryptocurrency industry to rock bottom. Some believe that the era of truly decentralized finance and decentralized exchanges may be upon us.
The allegations have not yet been proven to be true and should be viewed with a degree of skepticism given Gensler’s clearly biased views. The SEC’s enforcement actions have, in the past, been little more than light reprimands.
What is certain is that exchanges need to behave more like fintech companies and banks if they want to enjoy the efficiency and protection of operating as “centralized” companies. That means strict KYC (know your customer) rules, better disclosure, and stronger collaboration with regulators. That is why some believe that the true future of cryptocurrency exchanges is not DeFi, but exchanges like the so-called “FTX 2.0,” which had every incentive to follow the law.
However, it remains to be seen what Coinbase and Binance “version 2.0” will look like.
｜Translation and editing: Akiko Yamaguchi, Takayuki Masuda
| Image: SEC Chairman Gary Gensler (via video posted on Twitter)
｜Original: Are Centralized Exchanges in the US Doomed?