Two lawsuits filed this week by the US market regulator — the Securities and Exchange Commission (SEC) — could potentially determine the future of cryptocurrency.
Binance.com, the world’s largest crypto exchange, related entities and founder Changpeng Zhao were the target of the first lawsuit, which was filed on June 5. The next day, on the regulator’s 89th birthday, the SEC filed its second suit, now against Coinbase, another large exchange.
“There is nothing about the crypto securities markets that suggests that investors and issuers are less deserving of the protections of our securities laws,” SEC chair Gary Gensler said in a speech just days later on Thursday.
He added that crypto exchanges and promoters have long been aware of the rules of the road for trading in cryptos — through SEC orders and enforcement actions — but they have chosen to ignore them or dismiss as they “may have made a calculated economic decision to take the risk of enforcement as the cost of doing business”.
“You simply can’t ignore the rules because you don’t like them or because you’d prefer different ones: the consequences for the investing public are far too great,” Gurbir S. Grewal, head of the SEC’s enforcement division, said regarding the lawsuit against Coinbase.
Starting out with nothing in 2009-10, crypto is now an estimated to be a $1 trillion business, operating mostly in a regulatory grey zone.
Crypto exchanges have contended that their offerings — tokens — are not like securities and, therefore, their exchanges are unlike those that need to subject themselves to the usual rules.
The US regulator disagrees. And under the leadership of Gensler, who was appointed by US President Joe Biden in 2021, it has sought to assert its jurisdiction over the crypto exchanges arguing, its offerings — tokens — are securities and they must be registered with the regulator as others and so should their exchanges.
It has brought about 130 crypto lawsuits thus far, forcing smaller companies to shut down and others, who can afford the steep cost of litigation, to settlements.
Bitcoin and Coinbase are looking at fines if judges side with the SEC or settlements. These are civil suits and will not lead to imprisonment, but the Department of Justice (DOJ) could jump in at any stage in these or other cases, then jail terms become a possibility.
Sam Bankman-Fried, founder and head of FTX crypto exchange that went bankrupt in November 2022, was among those who heard from the department of justice, and is now facing jail. He is accused of stealing money from FTX customers for lavish purchases for himself, donations to politicians and risky trade deals.
FTX and such like disasters await investors because of crypto exchange and their promoters’ defiance of rules that apply securities trade in general.
“These types of misconduct and bankruptcies are more likely to happen in markets whose issuers and intermediaries fail to comply with foundational laws,” SEC chair Gensler has said, adding: “Even when we might not find fraud or such blatant misconduct, investors need proper disclosure, segregation of their hard-earned assets, and confidence that they are not trading against the house.”
Binance, which has denied the SEC charges and has said it will contest them in court, has been accused of, among other things, “wash trading” to boost trading volumes.
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