WASHINGTON — A pair of Securities and Exchange Commission lawsuits against two of the biggest cryptocurrency exchanges this week is rattling already-beleaguered crypto markets, but some observers say the actions could ultimately give the industry a firmer regulatory footing in the long term.
The SEC's suits against
Experts say that while the ensuing battles will inflict pain on the companies in the short term, the resulting legal precedents could provide clarity, and ultimately facilitate sustainable growth for the cryptocurrency industry.
Ian Katz, managing director at Capital Alpha Partners, LLC, said while the two suits level different allegations, both suits are underpinned by a belief Gary Gensler has long portended: Certain crypto exchanges are violating the law by offering unregistered securities.
"It's a big blow to the industry to have two of the biggest players sued by their regulator on consecutive days," he said. "It does look like the Coinbase suit is focused on being unregistered, and in the Binance suit the SEC is throwing everything in but the kitchen sink. The Coinbase case looks narrower. One problem for the industry is that the public may not make that distinction."
Katz said the legal actions came as no surprise, especially given
"The wide-ranging nature of the SEC complaint threatens the exchange's ability to operate as a major exchange with U.S.-based customers, and is another black eye for an industry trying to get past the FTX debacle," he noted.
Jaret Seiberg, managing director at Cowen Group, Inc., says while the lawsuits have the potential to weaken crypto companies themselves, he thinks the industry could benefit long term from the legal boundaries case decisions may delineate.
"This litigation may not be a positive for Coinbase, but it should be a positive for the crypto space. It should get crypto closer to final rules of the road regardless of how the judge rules," he wrote. "It is critical for crypto that Coinbase fights the SEC over this complaint. … We know the SEC's view of the law and we know the crypto sector's view of the law. What we lack are significant judicial reviews of those positions."
Crypto stocks sank on Tuesday as investors reacted to the regulatory action.
Whether SEC's recent allegations will spur lawmakers to pass new crypto legislation remains unclear, Katz said. Regulatory actions could sap enthusiasm toward legislation like a recent
"The Binance allegations are probably unhelpful to House Republicans' renewed effort to push ahead with crypto legislation," he noted. "The [bill's] effort to make the SEC the junior partner to the CFTC in crypto oversight reflects a desire by Republicans and the industry to avoid Gensler, for whom they share an intense dislike. Would the bill be the same if Gensler were at the CFTC instead of the SEC? Almost surely not."
Isaac Boltansky, managing director and director of policy research at BTIG, thinks the Republican-led House has struggled to make progress on legislation and doubts the SEC's actions will change any minds in what has become a fairly calcified partisan debate.
"[The House GOP framework] materialized slowly and struggled to secure Democratic support," Boltansky said. "The SEC's recent crypto-focused lawsuits do not materially alter the legislative calculus on Capitol Hill. With Congress seemingly either unwilling or unable to legislate on digital asset issues, only the courts can provide clarity on the regulatory questions of consequence. This suit presents real questions that need to be answered for crypto's future — including the viability of interweaving exchange, broker, and clearing services."
As for the odds of SEC victory, Seiberg thinks the agency may have a structural advantage. Given the lack of a clear regulatory framework, judges may side with the government and its power to oversee private exchanges in a market known for volatility.
"As for the merits of this case, we give the edge to the SEC, as the SEC gets to decide which cases to bring," Seiberg wrote. "We also believe judges may be reluctant to conclude that the federal government lacks the power to regulate crypto products that are performing similarly to traditional financial products."
SEC's actions were taken in coordination with at least 10 state financial regulators. A multistate task force led by California's Department of Financial Protection and Innovation also
Boltansky says any final ruling could take some time, and in the meantime he's watching whether the states collaborating with SEC issue cease-and-desist orders against Coinbase.
"The bigger concern in the near-term may be Alabama's 'show cause' order focused on [Coinbase's] staking rewards offering, as it is the first step toward a cease-and-desist order in that state and because other states could follow," Boltansky wrote. "Given that the SEC suit will likely take years to resolve, state-level actions warrant watching."
