Crypto’s reputation as a lawless, “Wild West,” was touted by enthusiasts as a positive.
Now, as the U.S. Securities and Exchange Commission (SEC) and its head Gary Gensler aim for the sector’s jugular with lawsuits against Coinbase and Binance, two of the industry’s largest players, a decade-plus of financial freewheeling for digital asset players looks to be coming to an end.
“The crypto community believed and had a real conviction what they were doing was so new that existing laws could not possibly apply. And in the history of financial services, there’s basically never been a group of people with any commercial success who had that conviction,” Amias Gerety, Partner at QED Investors, told PYMNTS CEO Karen Webster.
The reason, Gerety added, is because “once you have that conviction, then you start searching for excuses not to comply.”
And that pervasive culture of noncompliance is now running into a regulatory wall.
At the center of the SEC’s lawsuits is the allegation that among the hundreds of cryptocurrencies being traded across both Binance’s U.S.-based platform and Coinbase’s crypto exchange, at least 19 of them are securities.
Because both exchanges have to-date failed to register with the SEC as securities exchange, broker and clearing houses, as required by law — the regulator is alleging that they are operating illegally as unregistered securities exchanges.
Gensler has repeatedly insisted that, in his view, a majority of the 10,000 cryptocurrencies currently being traded in the market are securities.
“Coinbase and Binance reference the ‘Howey Test’ in their arguments that crypto tokens aren’t a security, and it’s almost plausible on its face — but it has really big problems … and it puts courts in a really hard to position to say, ‘okay some of these guys [like Solana, Polygon, Cardana] aren’t securities because they’re not scams. But if they aren’t securities, then the scams aren’t either,” Gerety said, meaning that investor protections don’t apply to them — or their investors — either.
As PYMNTS reported, the two mega exchanges under fire are basically saying that the crypto tokens they offer their customers — which may have been defined as securities contracts during their initial first minting — are not securities for their entire lifetime (if they ever were at all) and that the exchange only offers its customers those tokens whose utility exists independent of the minting conditions.
Gerety explained, though, that the definition of a security is not based on whether or not an asset has utility — and that even if an object or entity under discussion does have real utility, it can still be a security as long as it passes four tests.
And, as he points out, this “spirit of noncompliance” where crypto firms have consistently retreated in “carefully noncompliant steps” from accepting that they may be liable for adhering to certain existing regulations to the point where they are now quibbling over miniscule legal technicalities, is in part what has drawn the SEC’s ire.
Particularly after a 2022 full of fraudulent evaporations and disastrous bankruptcies, as exemplified by the November blowup of the crypto exchange FTX and the rapid fall from grace of its founder, Sam Bankman-Fried, the federal regulator is likely feeling burned by the sector after trusting its “let us innovate” plea.
See Also: Will SEC Suit Against Coinbase Land Heads or Tails for Crypto?
The world of cryptocurrency is facing a lot of uncertainty and challenges when it comes to regulation and compliance with existing laws within the U.S.
Gerety said that he thinks “we’re in for a pretty long road about settling this” because “no matter what happens, these decisions are getting appealed.”
He explained that Ripple’s already years-long case with the SEC would “have huge implications” when it settles but that the crypto’s case might “go all the way up to the lip of the Supreme Court” before regulatory clarity can be determined.
The situation is complicated by a divided Congress, especially because Securities Law is not constitutional and can be rewritten by lawmakers themselves, not judges.
“I do think there is a chance, depending how these court cases go, that you could see a world where Congress springs into action,” Gerety said.
Until then? Gerety sees “business as usual” as the best choice for the embattled exchanges because it could support their legal posture.
Still, he emphasized that if the SEC were to eventually win in court, the classification of crypto tokens as securities wouldn’t destroy the digital asset industry in the U.S.
“I don’t think it’s true that the securities laws are incompatible with the creation of value in the U.S. economy,” he said, explaining that, “in a world where the SEC wins, I think there will be a commensurate pressure on the SEC to create on-ramps for projects to register and comply.”
It remains to be seen how these issues will be resolved, but one thing is certain: the crypto industry is in a state of flux and will continue to face challenges as it evolves and grows.
For all PYMNTS crypto coverage, subscribe to the daily Crypto Newsletter.
We’re always on the lookout for opportunities to partner with innovators and disruptors.
Learn More