Clarity or Confusion: Decide for Yourself
On June 5th, the Securities and Exchange Commission (SEC) initiated proceedings against Binance, and the following day, they filed a case against Coinbase. A summary of both lawsuits can be found at the end of this article.
Understanding the Background
While there's a clear need for regulation in the blockchain and digital assets industry, it's interesting to observe the relationships within this sphere. SEC Chairman Gary Gensler has shown friendly ties with Sam Bankman Fried and FTX. Intriguingly, Bankman Fried was the second-largest donor to the Biden campaign, yet notable crypto-sceptics like Elizabeth Warren and Gensler have refrained from pursuing actions against him, despite their numerous encounters.
A Timeline for More Context
October 20, 2020
Sam Bankman Fried (SBF) of FTX donates $5 million to the Biden/Harris campaign making him the 2nd largest donor.
February 3, 2021
Joe Biden appoints Gary Gensler as chair of the SEC. Duties include; protecting investors from fraud and abuse and ensuring that markets are fair.
May 10, 2022
SBF (FTX Founder) and Gary Gensler meet in person to discuss crypto regulation. This marks the first time that the SEC Chair has met with a major cryptocurrency exchange CEO.
November 11, 2022
FTX files for BANKRUPTCY, leaving customers without access to millions. The market lost billions in the aftermath, and FTX is labelled one of the worst frauds in history.
June 2023
The SEC attacks sound businesses that have been attempting to work with regulators for over a decade (Coinbase, Kraken).
Gensler is also a former blockchain and digital assets educator at MIT; he recently confessed to never having used the technology in practice. It's questionable how he taught the subject without hands-on experience. It's important to note that the entire course at MIT was dedicated to the value proposition of blockchain; this is in stark contrast to Gensler's latest commentary on CNBC, where he asserts, “we don't need more digital currency; we already have digital currency, it's called the US dollar, it's called the Euro, they are all digital right now. We already have digital investments.” You can watch the entire interview here.
More of his past statements add to the complexity of the situation. For example, in this video (link below), Gensler praises Algorand (ALGO), a token recently classified as a security by the SEC. In another video (link below), Gensler states that most crypto tokens are not securities, a position he seems to have significantly shifted from. His exact comments, “three quarters of the market are non-securities, they are just a commodity, you know, cash crypto. So you will hear debate about initial coin offerings and what's security and what's not. Relevant, relevant and important debate but for three quarters of the market its not particularly relevant as a legal matter.”
Algorand Video Link
Securities Video Link
In Gary Gensler’s latest testimony, he also asserts that there is already clarity for the industry, especially when it comes to securities laws. However, when probed on the topic, he couldn’t even provide a simple yes or no answer. If the topic is as clear cut as he makes them out to be, then why can he not answer the most basic questions about ETH, the second largest digital asset that has been around since 2015? You can watch some of his answers here.
Moving On To The Cases
Binance's secretive approach to its operations and ownership make it difficult to ascertain the potential impact of the SEC's allegations. Coinbase, on the other hand, is a publicly listed company in the United States, which makes the charges against them—that they unfairly profited from trading unregistered securities—seem more surprising.
Coinbase issued a response video to the allegations, highlighting key facts:
"Staking" was mentioned 57 times in their public S1 report.
They held 30 meetings with the SEC in 2022, seeking guidance.
90% of tokens are rejected due to failing to meet legal standards.
The test used by the SEC to determine securities status was written in 1946.
One million tech jobs are at risk of being driven out of the USA.
Thirty-three countries are currently establishing comprehensive crypto rules.
The SEC has established zero comprehensive rules for crypto in the USA.
This pattern of behaviour suggests that the SEC is regulating through enforcement, contradicting their assertion of being open to discussions about blockchain and digital asset projects. Critics argue this demonstrates inappropriate regulatory conduct.
The Ongoing Debate
Prominent figures like Elizabeth Warren and Gary Gensler are criticized for impeding innovation and pushing this tech revolution offshore. As per Nic Carter's compelling article, Chokepoint 2.0, it's argued to be unconstitutional for regulators to pressure banking institutions into debanking perfectly legal businesses. The ongoing discord indicates that maybe the issue isn't crypto but rather Gensler's fear of disruption in established financial systems.
The consequence of such regulatory behaviour might lead to an acceleration in an already significant geopolitical shift, with the East assuming global financial leadership. Once governments around the world realise that these actions from the SEC are deeply political and have nothing to do with the underlying technology, we can expect them to see the advantageous opportunity of embracing this emerging asset class whilst the US stifles it.
This is an opportunity for the 33 jurisdictions that are currently working on comprehensive regulation for the industry to attract entrepreneurs and highly skilled labour; they will take this opportunity.
SEC Lawsuits Summary
In the case against Binance, the SEC alleges the company violated federal securities laws by offering and selling crypto assets, including BNB, BUSD, and other tokens, without registering them as securities. Additionally, the company is accused of manipulative trading practices and inadequate anti-money laundering procedures.
As for Coinbase, the SEC accuses them of operating a trading platform for crypto asset securities without proper registration and of not providing necessary disclosures and protections to their investors, thereby exposing them to significant risk. The SEC is seeking injunctive relief, disgorgement of ill-gotten gains, prejudgment interest, and civil penalties against the company.
Our stance on this topic is echoed by Fred Wilson of Union Square Ventures, "When they want to shut it down, I say double down." This is the signal in the noise, “When you see that fear in their eyes, invest in the cause of that fear.” They are fearful because they are terrified that the free market will decide that decentralised, fair, global and transparent financial rails are superior.
Whilst we all have the option to look, to seek to understand, it’s often easier not to. Bitcoin, Ethereum and distributed ledger technology are complex systems that require significant due diligence. At Etherbridge, we aim to lower the barriers to understanding this fast-growing digital economy.
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This is not financial advice. All opinions expressed here are our own. We encourage investors to do their own research before making any investments.
