The Securities and Exchange Commission’s lawsuits against Binance and Coinbase this week have set up a high-stakes battle that will engage all three branches of the U.S. government in a competition for power, determine whether the crypto industry will decamp the U.S. for good, and define the future of digital money.
The SEC’s aggressive actions against Binance, the world’s biggest crypto exchange, and Coinbase, the biggest in the U.S., are a big flex, one that reveals the agency’s extraordinary discretionary power. In saying “we don’t need more digital currency” in interviews following the announcements, SEC Chairman Gary Gensler suggested he truly does want to destroy the crypto industry.
By throwing the book at Binance, a thoroughly international company, and its high-profile CEO, Changpeng Zhao (“CZ”), with a suit that, among other claims, alleges that it offered unregistered securities and commingled customer funds, the SEC has sought to demonstrate that its reach extends beyond U.S. borders.
And with the Coinbase case it is, quite clearly, taking aim at a much wider set of players than just that one defendant. The case is premised on the notion that most of the securities traded on the San Francisco-based exchange are unregistered securities, creating legal concerns for the likes of Algorand, Polygon and Solana. The actions directly go after the centralized finance (CeFi) system on which Binance’s and Coinbase’s custodial models are based and, indirectly, some of the main protocols on which decentralized finance (DeFi) depends.
But this is far from a slam-dunk for the SEC. For one, the cases likely won’t be decided or settled for many years – if the SEC’s three-year-old case against Ripple Labs is any indication. Both Coinbase and Binance are vowing to fight hard in court, which will leave the Commission’s resource-challenged enforcement team stretched under a massive workload.
And the SEC’s hardline approach does not enjoy widespread support in other areas of the U.S. government. The timing of these actions being what it is, the agency is almost willing other bases of power to come after it.
Other branches of government, other ideas
To start with: Congress.
A draft bill that will soon come before the House sets parameters for how to classify digital assets and circumscribes the SEC’s powers of interpretation of crypto within existing securities law, curtailing its capacity to launch these kinds of enforcement actions. It is co-sponsored by Rep. Patrick McHenry (R-N.C.), the chair of the House financial services committee, who has been critical of Gensler’s aggressive actions against the crypto industry, and Rep. Glenn Thompson (R-Pa.), the chair of the agriculture committee, which has jurisdiction over the Commodities Futures Trading Commission (CFTC), the other big agency vying for a greater say in crypto regulation.
Whether the McHenry-Thompson bill gets through a Democrat-controlled Senate and eventually makes it into law is doubtful within the current electoral term, but the proposed legislation makes for a very important talking point as the election season ramps up.
That brings us to a second branch of government: the executive, within whose authority the SEC and other such agencies fall. These lawsuits will land into a presidential campaign in which the future of crypto and digital assets will, like never before, be part of the public debate.
Already, expressions of support for crypto have come from three Presidential hopefuls: Robert F. Kennedy Jr., who is challenging Biden for the Democratic nomination; Florida Governor Ron De Santis, seen as the main challenger to former President and third-go-round candidate Donald Trump, and biotech entrepreneur Vivek Ramaswamy, another Republican contender. Trump, until now the Republican frontrunner, has himself used non-fungible tokens as fundraising vehicles, though his pronouncements on crypto have been all over the shop.( Of course, his indictment on federal charges Thursday evening raises big questions around his candidacy.)
Read more: David Z. Morris - The SEC Is Fighting the Last War
Whether or not Biden retains the presidency, this level of attention on the industry will help shape the politics of how a future SEC deals with these cases.
Then there’s the Supreme Court, which last month scaled back the Environmental Protection Agency’s power to enforce rules on landowners based on the Clean Water Act. What does this have to do with the SEC and crypto? Conservatives, who now control the court, see the EPA as just the first regulatory agency whose authority needs to be clipped. A more sweeping attack on executive agencies is coming, and the SEC is likely to be a target.
In other words, a perfect political storm is brewing that makes the outcome of this current war on crypto hard to predict.
The multi-front nature of this fight also raises the stakes in that outcome, even if we have to wait years to see it.
If the Gensler strategy of all-out attack wins, it could be the de facto death knell for crypto in the U.S. Developers will leave en masse to set up shop in Dubai, or Bermuda, or Singapore, or France, or in any number of jurisdictions that are proactively developing regulatory guardrails for crypto innovation to occur.
This is not to say certain bank-licensed stablecoin ideas or real-world asset tokenization strategies led by existing, regulated institutions and public companies, won’t be allowed or even encouraged in the U.S. But since these would struggle to interface with the permissionless architecture of prohibited “crypto” blockchains, an outdated U.S. capital market might struggle to compete with the new models of programmable money and decentralized governance being fostered elsewhere.
Alternatively, the passage of time and the mounting counteroffensive from crypto’s supporters in Congress and in the courts could quash this wave of attacks. But to what end? If such a victory just further entrenches politicization and partisanship around this issue, the bigger, most important battle – for mainstream acceptance and adoption – will still need to be fought.
What’s needed – for all of our peace of mind – is for the crypto topic to transcend politics. It would be nice to think that this would happen organically because, after all, this is a technology – it should be apolitical. But, sadly, it’s going to be up to the crypto community to engineer. There should be a focus on education efforts, which show real use cases and demonstrate the benefits to humanity from this industry’s approach to decentralized value exchange and data-sharing.
We must try to ignore the theater in Washington, not to disengage with the political process but to figure out how to do so in a way that can appeal to both sides.
A part of that is to focus on a positive narrative. Surely, in an age of great uncertainty around climate, geopolitical tensions and the encroachment of artificial intelligence into society, there’d be a market – on both sides of the political aisle – for such a story.