What Does the SEC’s Lawsuit against Coinbase and Binance Mean for the Crypto Industry?

The Securities and Exchange Commission, the United State’s main financial regulator, has sued both Coinbase and Binance for operating unregistered exchanges and facilitating the trade of unregistered securities. This lawsuit could set the precedent for the next decade and beyond for the cryptocurrency industry, as well as finally provide regulatory guidance. Let’s analyze the lawsuits and their basis, what the potential outcomes could be, and how different cryptocurrencies will be affected.

Ever since 2021, when Gary Gensler was sworn in as the chairman of the SEC, the industry expected greater cryptocurrency regulation. Gensler was a former MIT blockchain professor and had mentioned in his classes that many cryptocurrencies were likely securities, meaning they should be regulated by the SEC and under the jurisdiction of the US government. He has taken action against a few separate companies and projects, such as continuing to pursue Ripple Labs, LBRY, Kraken, and others. In retrospect, it appears likely that the SEC was pursuing smaller companies to build a legal precedent before taking on the massive and expensive legal teams of the two biggest and most well-known exchanges.

The SEC alleges that Coinbase acts as an unregistered exchange and as a broker and clearinghouse, meaning they provide not only the medium of exchange but also the liquidity and middleman services, creating a potential conflict of interest. Binance, on the other hand, has the same charges and more due to its separate Binance US exchange. The SEC states that Binance’s founder, Changpen Zhao, held an outsized control of the US exchange and used it to pressure them into listing BNB, which they knew was likely a security, as well as attempting to get VIP users on the regular Binance exchange through deceptive practices. 

Both companies will be fighting charges about listing unregistered securities. The SEC named 19 coins, including prominent names such as BNB, Cosmos’ ATOM, Solana, Algorand, Cardano, Polygon, and Filecoin as securities. Even BUSD, Binance’s stablecoin, was labeled a security, but oddly enough USDC, Coinbase’s stablecoin, remained unscathed. It may be possible that the SEC simply went to the “tradable” page on Coinbase and chose the top assets, as a picture from the complaint implies, which would explain why ATOM is listed in Binance’s suit but not Coinbase’s, even though both trade the asset. This demonstrates a lack of knowledge from the SEC and could be a good sign for the fate of Coinbase. 

The outcome of these lawsuits will forever change the cryptocurrency industry. If the SEC wins either, it will have significantly greater control over exchanges and cryptocurrencies that could be securities. Of the two, it is much more likely for Binance to lose its suit since their listing of BNB and CZ’s involvement is blatant and documented. Additionally, the SEC has ordered the freeze of Binance US’s assets, a move they did not make against Coinbase. 

If the lawsuit is won on the basis that the listed cryptocurrencies are securities, it would fundamentally change the way that the cryptocurrency industry works. For smart contract protocols like Polygon and Solana, a security label would create numerous questions, such as how users must document their use to pay transaction fees, the legal status of validators, and if any DeFi app is legally authorized to exist. These labels would arguably be more devastating to the long-term health of the industry than Binance shutting down, and there needs to be a new classification for these types of assets.

If neither lawsuit is successful, which is very unlikely given the number of charges and evidence, the cryptocurrency industry will be in a stronger position than ever. Lenient regulation will give companies more opportunities to take risks and provide unique services, and cryptocurrencies can continue to exist with the safety of knowing they are not under the purview of the government.

Given all of this information, the only cryptocurrency guaranteed to be safe is Bitcoin since it has already been declared not a security. Ethereum, an asset that Gensler has wanted to pursue as a security for some time, was left off both lists, meaning they either are waiting to form a stronger legal argument against it after these cases or they do not think they could win the suit. Either way, it is safe for now but by no means safe in the future.

These lawsuits will likely take several years to finalize, so we will not have an answer to many of our questions for a while. Even though some sort of cryptocurrency regulation was expected to appear while Gensler was in office, it is unfortunate that it comes in the form of allegations and lawsuits instead of a cooperative and innovation-friendly solution. Only time will tell how this event will change Web3, but one thing is for certain: the outcome of this case will not affect blockchain’s promise to create a more decentralized, transparent, and censorship-resistant internet. 

By Lincoln Murr

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