Last year, Bitcoin fell from its 2021 high, and 2022 ended with the collapse of cryptocurrency exchange FTX.
The Securities and Exchange Commission sued two more big exchanges this week: Binance and Coinbase. Despite the fact that the lawsuits contain separate allegations, each contend that the corporations operated unregistered securities exchanges.
Binance, the world’s largest cryptocurrency exchange, and its founder, Changpeng Zhao, were sued by the SEC with mishandling customer assets and illegally serving US customers. The SEC also charged Coinbase, the only publicly traded cryptocurrency exchange, with operating an unregistered securities exchange illegally.
They both disputed the charges.
A shadow of uncertainty remains over crypto exchange regulation, which has contributed to the decline in bitcoin values. Will this deter ordinary investors and potential crypto investors?
The future of crypto-asset regulation in the United States is not fully predictable, said Yuliya Guseva, a law professor at Rutgers University and the director of the school’s blockchain and fintech programme.
A law professor raises three red flags
1. The SEC also claims that Ripple Labs Inc., a cryptocurrency payment startup based in San Francisco, marketed unregistered securities in exchange for its native token, XRP. Ripple refuted the SEC’s assertions that XRP was traded and utilized as a digital currency in April. Analysts are keeping a careful eye on the result of this case, hoping for an answer to the question of whether and when digital assets are considered securities.
In contrast, Ripple’s chief legal officer Stuart Alderoty responded to the SEC’s accusations by saying that even if true, this only demonstrates that the SEC’s unelected bureaucrats believe they have unchecked authority to issue arbitrary closed-door orders under threat of retaliation to those who don’t blindly obey. Regulation by enforcement has given way to the most heinous kind of hubris.
2. As a further bill is introduced, some observers are speculating as to whether Congress will be able to assemble a statutory reform for the cryptocurrency markets. The likelihood of this occurring is “highly improbable,” according to Guseva. She stated that the SEC’s enforcement section “has been covering a constantly expanding swath of the crypto industry.”
3. The decisions made in the Binance and Coinbase cases are equally crucial.
Ripple, Binance, and Coinbase responded
This week, Binance stated on its blog: The SEC’s real intent here instead appears to be to make headlines. The cryptocurrency exchange continued, saying: All user assets on Binance and Binance-affiliated platforms, including Binance.US, are safe and secure, and we will vigorously contest any claims to the contrary.
In order to freeze assets connected to Binance, the SEC is requesting that a judge issue a temporary restraining order.US. The court docket for the case indicates that a hearing on the motion will take place on Tuesday in Washington D.C. District Court.
In order to freeze assets connected to Binance.US, the SEC is requesting that a judge issue a temporary restraining order.
The SEC’s reliance on an enforcement-only strategy in the absence of clear regulations for the digital asset industry, according to Coinbase’s chief legal officer and general counsel Paul Grewal, has been hurting the economic competitiveness of the United States and businesses like Coinbase that have a track record of compliance.
He asserted that legislation—rather than litigation—is the answer. We’ll carry on doing business as usual in the interim, Grewal added.
According to Rutgers law professor Guseva, the outcome of the Ripple case is equally critical. According to her, there is a progression of SEC enforcement proceedings. The SEC began with unregistered [initial coin offerings], or primary markets.
Guseva said that Ripple is among the final examples of this generation. The main issue in these situations is whether digital currency assets qualify as securities. A significant win or loss for the SEC will therefore depend on the outcome of the Ripple litigation.
What is the SEC hoping to achieve?
In court documents, SEC attorneys claim that Binance and Coinbase have received “ill-gotten gains” that they want to recover.
However, according to Oleg Elkhunovich, a partner at Susman Godfrey, the government is not targeting the properties or money of users. A remedy that targets gains that were obtained illegally is called disgorgement. They wouldn’t be user assets. He suggested segregating user assets.
The founder of Binance, Changpeng Zhao, often referred to as “CZ,” is accused in the SEC lawsuit of controlling customer funds and combining them with personal and business holdings.
The SEC is also asking the court to appoint a receiver, who is typically a lawyer or a third party who takes control of the corporation. Elkhunovich explained that if the court approves, the amount of such control will be decided by the judge’s order.
However, the disgorgement attempt is significant for Binance and Coinbase, according to Guseva. This is a big remedy that might damage businesses.
FTX is in bankruptcy proceedings, and its co-founder and former CEO, Sam Bankman-Fried, has pled not guilty to criminal charges. Bankman-Fried is accused with fraud and conspiracy. The trial is set to begin in October.
What does this mean for cryptocurrency?
According to some analysts, the lawsuits do not pose “existential risks” to cryptocurrency pricing. For example, Bitcoin prices initially fell on news of the Binance lawsuit, but have since mostly recovered to where it was.
On Thursday morning, bitcoin was worth more than $26,300, while ethereum was worth more than $1,800. Bitcoin-focused exchange-traded funds have fallen for the week.
Shabana Nathoo, a principal at Navigo Wealth Management in Southlake, Texas, claimed that consumers considering cryptocurrencies as an investment now have “even more doubt” as a result of the SEC’s activities.
When clients have inquired about crypto investments, she has always given the disclaimer that investing in cryptocurrencies is a fresh, revolutionary idea and that you should not risk more than you can afford to lose. It should be less than 1% of their net worth, according to Nathoo.
Despite declining 15% over the previous five trading days, Coinbase shares had increased by more than 52% year to date. The S&P 500 has increased by more than 11% since the year’s beginning, while the Dow Jones Industrial Average has increased by 1.7%.
Who is investing in cryptocurrencies?
The dramatic decline in cryptocurrencies in 2022 may have alarmed some, but crypto isn’t a speculative investment, especially for younger investors.
According to recent data from the FINRA Investor Education Foundation and the CFA Institute, slightly more than half of respondents aged 18 to 25 who invested claimed they were primarily involved in cryptocurrencies.
In comparison, 41% of these Generation Z investors reported owning individual equities, while 35% reported owning mutual funds.
A different poll reveals the presence of cryptocurrency. According to Morning Consult, 22% of individuals owned some type of cryptocurrency in April. This is an increase from 19% in January.
Following the Coinbase case, Brian Armstrong, the exchange’s CEO and co-founder, made the same point regarding cryptocurrency hazards.
He often tells people, “Don’t invest money you can’t afford to lose,” he said in an interview on Wednesday. This is a new technological field. It is one of the world’s most important technological sectors. However, never speculate with assets that you cannot afford to lose.
