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Two of the largest crypto companies in the world have been sued back-to-back, sending a chill down the spine of the digital asset ecosystem in the United States.
The Securities and Exchange Commission filed two complaints in less than 24 hours against Binance and Coinbase. They claimed that they were operating illegal securities exchanges within the United States. The SEC has escalated its campaign to regulate an industry that had operated for years in a gray area.
Binance's platform saw nearly $800,000,000 in withdrawals from investors within 24 hours. Coinbase stock fell more than 12% on Tuesday.
These lawsuits could lead to a lengthy litigation process that may take many months or even years.
Many US investors/believers are still in limbo. The big question is: Where can you trade cryptocurrency safely?
The short answer is: probably not. For now, at least.
Bloomberg columnist Matt Levine wrote that "all cryptocurrency exchanges commit crimes and, if you are lucky, your exchange only commits processing crimes."
The SEC, the leading Wall Street regulator, considers all crypto tokens, except bitcoin (which I will discuss later), to be securities. You can't operate in the securities industry without a license.
Coinbase (reasonably), argues that the SEC has already approved the business model of the company when it gave it the OK to go public in the year 2021. The company also claims that it has worked with regulators in order to comply with the law.
Brian Armstrong, CEO of Coinbase, tweeted on Tuesday that there was no way to "come in and sign up". We tried it repeatedly. The SEC, instead of releasing a rule book with clear guidelines, has adopted a regulatory by enforcement approach.
The murky world of regulations
Crypto firms often complain about the lack of clarity in the regulatory framework. They claim that the United States pushes the crypto industry abroad, ceding control to foreign regulators who have more clear guidelines.
Gary Gensler is a crypto-skeptic who's the top cop at SEC. He doesn't care if that's true.
Gensler said on CNBC that we do not need any more digital currency. We already have digital money: it's the US dollar. The euro, the yen or both are digital currencies. We have already made digital investments.
Gensler's Investor message: The SEC will be there for you.
The US Securities laws are a benefit to the investing public. Crypto should not be any different. These platforms, these middlemen, must comply, he added.
The SEC’s double-whammy civil cases lay the foundation for litigation and, eventually, judicial reviews that could force Congress to act.
Analysts at TD Cowen wrote: 'Our opinion continues to be Congress can end policy chaos which has surrounded cryptocurrency for the last year'. This litigation is not good for Coinbase but should be great for the crypto industry. The judge's decision should not matter. It will bring crypto one step closer to the final rules.
Reena Aggarwal of Georgetown University’s Psaros Center for Financial Markets and Policy said that US investors should be careful where they invest in cryptos. US regulators are aggressively pursuing crypto firms. I do not expect this to stop.
Aggarwal stated that futures contracts for bitcoin and ether traded at the Chicago Mercantile Exchange are a good bet, as the exchange is regulated. There are ETFs that are linked to bitcoin-linked futures, offered by traditional financial institutions.
Bitcoin, the first and most popular cryptocurrency in the world, surged Tuesday, despite the crackdown by regulators. This is partly because the SEC sees virtual currencies as commodities under the jurisdiction of the CFTC.
Bitcoin, which had fallen 6% on Monday, has rebounded and is now trading at over $27,000.
Ed Moya is a senior analyst at Oanda. He wrote that many crypto investors are abandoning the so-called alt coins' in favor of the more reliable OG virtual currencies.
Moya concluded: 'The SEC appears to be playing Whac-A-Mole in relation to crypto exchanges'. Crypto investors will need to decide if they feel confident about the availability of various exchanges to trade.
It's not a guarantee. Crypto trading, a high-risk endeavor even in the best circumstances, has always demanded a strong stomach.