We’re entering a new phase in the development of the crypto ecosystem. The era of crypto exchanges and crypto businesses operating without any regulatory oversight are coming to an end.
The European Parliament voted 517-38 in April on a comprehensive package of new rules aimed at regulating the crypto industry. The rules, on balance, appear to be fair to investors, crypto exchanges, and the crypto industry. They provide a relatively clear road map for what’s allowed and what isn’t. And they’re flexible enough that the industry still has room to innovate and grow.
On June 1, new rules went into effect in Hong Kong for governing crypto exchanges and the crypto industry. The goal of the rules is to protect retail investors and turn Hong Kong into a crypto hub.
In October, the U.K. will start enforcing new marketing rules for crypto.
The only country not actively moving toward meaningful regulations is the United States. Instead of regulating the crypto industry, the Securities and Exchange Commission (SEC) is suing it.
Earlier this week, the SEC sued Binance and Coinbase. The regulatory agency accused the two crypto exchanges of, among other things, selling unregistered securities and failing to register their exchanges with the SEC.
In the lawsuits, the SEC declared that Solana, Cardano, Cosmos, Polygon, COTI, Decentraland, Algorand, Filecoin, The Sandbox, Axie Infinity, Chiliz, Flow, Internet Computer Protocol, NEAR Protocol, Voyager Token, Dash, and Nexo were all unregistered securities.
The SEC also said that there were many more unregistered securities, but declined to name them.
So while the rest of the world moves forward by creating rules and guardrails for the industry to follow as it grows and matures, the U.S. has chosen lawsuits and ambiguity. That brings us to two critical questions. Why? And will it work?
Let’s start with why. So far, the U.S. response to crypto has been rooted in four basic principles:
- Crime. There is a belief that the only thing crypto is good for is enabling criminals, terrorists, and bad actors of all sorts to move money around the world or launder money in ways governments and law enforcement can’t stop or track. Built into that belief is the idea that law enforcement has a good handle on the more traditional ways of laundering and moving money. So let’s ban crypto because there’s already too much work to do.
- Taxes. People are making a lot of money. Let’s make sure it gets taxed.
- Dollar hegemony. The U.S. dollar is the world’s reserve currency. Central banks and large institutions all over the world hold U.S. dollars to provide stability and purchasing power, especially during economic crises. Crypto threatens the status of the U.S. dollar as the dominant global reserve currency. The problem with this line of thinking is it shows a fundamental misunderstanding of crypto. Crypto can be a solution for cross-border transactions. But it’s actually not a good solution for making or adjusting monetary policy or responding quickly to any financial crisis. Both the dollar (or any fiat currency) and crypto should be able to coexist and work together.
- Investor protection. You see two flavors of this. One is the perfectly reasonable expectation that exchanges and crypto companies act in a responsible manner because investor money is at risk. The second flavor is born out of the paternalistic notion that investors are too dumb to understand what they’re investing in and need to be protected from themselves.
These four pillars have created a hostile policy environment for crypto — one that’s more interested in lashing out at crypto than nurturing it. So rather than work constructively to create an environment that promotes smart and responsible growth, the SEC feels comfortable lobbing lawsuits and refusing to respond to basic requests — like how a crypto exchange should register if there isn’t a path to registering. (To better understand the SEC’s tactics in these lawsuits, subscribe to Crypto Asset Strategies. In today’s Crypto Monitor podcast, I discuss — read, rant — the SEC’s flawed and hypocritical approach to regulating crypto.)
But will the SEC’s lawsuits work?
It depends on what you mean by “work.” Binance.US just announced that it is suspending U.S. deposits today, removing crypto/USD trading pairs shortly, and will become an all-crypto exchange. It will also stop withdrawals as early as June 13 (the exchange is having banking issues). That means you’ll be able to trade crypto. But you won’t be able to use dollars to buy or receive dollars when you sell. You’ll need to use crypto to buy and receive crypto when you sell. And you won’t be able to convert your crypto into dollars for the purposes of withdrawing it.
So in that sense, the SEC lawsuits will likely change the nature of how some exchanges operate. Just remember to withdraw your money from Binance.US ASAP and understand that Binance.US is in a lot more trouble than the other crypto exchanges the SEC has sued.
But will the SEC succeed in killing crypto in the U.S.? I don’t think so.
Part of the SEC’s case relies on untested legal theories of what a security is and whether a financial instrument can change over time (from a security to not a security). The courts will sort that out. Another element in this is whether the SEC has authority to regulate crypto — or regulate crypto in this manner. I believe the exchanges the SEC has sued have a reasonable chance of winning in court — especially if they’re prepared to go to the Supreme Court (something I discuss in today’s Crypto Monitor). And some of the coins named in the SEC lawsuit have begun fighting back as well.
The SEC lawsuits have also instilled a sense of urgency within the industry to get Congress to act. Behind the scenes, the pressure is piling up. Plus the one thing Congress hates more than an industry that challenges the status quo is falling behind the rest of the world in any industry. So there’s a decent chance that some sort of legislative framework will emerge that makes the SEC lawsuits less relevant.
The other factor at play is that crypto is relatively popular. The younger the voter, the more likely they are to support crypto — or at least not have any animosity toward it. This matters.
That’s why I believe the SEC lawsuits will prompt the U.S. to join the rest of the world in regulating crypto. I might be wrong. But that’s my read on the situation.