The cryptocurrency industry is gearing up for hearings before Congress earlier this week, hoping it will pave the way for a new regulatory framework.
The chairman of the Securities Exchange Commission has other ideas.
On Monday, Gary Gensler dropped his long-awaited lawsuit against Binance, revealing the embarrassing details of the world's largest cryptocurrency exchange's campaign to avoid US regulations. The next morning, he filed a second lawsuit against Coinbase before going on a television tour where he declared that the crypto industry is illegal and out of control. He also told Bloomberg that we need cryptocurrencies: "We don't need another digital currency... We already have a digital currency - it's called the US dollar."
Gensler's initiative was an unusual political move by regulators, but just as successful. Even the biggest critic of the industry admitted to Fortune that the chairman of the SEC will put them on the defensive and corner Coinbase for a week because the company plans to release case files with Congress to create a better regulatory system. .
Gensler may win this week, but it's unclear whether he'll achieve his long-term goal of dominating the crypto industry. Crypto numbers tell you that Gensler's aggressive enforcement campaign has landed him in trouble, and he predicts that it's only a matter of time before the SEC deals damage in federal court. Others, however, are less optimistic. According to legal sources, the lawsuit filed against Coinbase this week threatens the existence of the company and the entire US crypto industry may be in debt.
"You can ignore the rules."
The content of the two SEC crypto complaints is quite different. In the case of Binance, the firm has alleged that it tried to deceive US regulators. It's also interesting that the SEC filed the complaint in Washington - a sign that legal experts are also awaiting criminal charges against Binance.
Instead, the SEC sued Coinbase in Manhattan, the usual forum for the most common securities disputes. And of course, the agency's claims against Coinbase are more mundane. However, sources close to Coinbase told Fortune that Gensler took time to coincide with the SEC complaint against Binance in order to confuse the company's behavior in the minds of the public and lawmakers.
Meanwhile, the SEC stepped up its efforts to brand Coinbase as a fraud on Tuesday, with a senior official saying they "can't ignore the rules just because they don't like them or because they prefer a different rule."
It is unlikely that the federal judge handling the case will have considered the SEC's tactics in the final decision. But that may not matter because the agency's allegations, while not as dramatic as those against Binance, are still serious and pose a serious threat to the model if they continue. Coinbase Trading.
SEC accuses Coinbase of selling 13 tokens as unlisted securities. Meanwhile, the agency said that although the agency was operating as a broker, exchange and fraud, it did not obtain the agency's license.
In the traditional financial world, the SEC requires these activities to be performed by different companies to protect consumers. However, Coinbase and other crypto firms argue that blockchain technology makes such distributions redundant and that it would be foolish to square peg their transactions through the loopholes of deferred financial regulation.
The bottom line is that if the SEC wins the case, Coinbase will be very weak. It may be forced to abandon some of its core businesses and sell bitcoin and ethereum, increasingly low-margin, standardized businesses. According to industry experts, this means that the regulatory environment of US crypto companies is no longer sustainable.
"There's a 33% chance that Coinbase will disappear in the US in five years," said Preston Byrne, a longtime crypto and Brown Rudnick partner.
Byrne predicts that if Coinbase faces hurdles in the SEC case, the company will accelerate its international expansion strategy. He adds that tougher enforcement by the SEC a decade ago may have spelled the end of the entire cryptocurrency industry, but the US market is now being eclipsed by overseas markets – a trend he believes will continue in populous countries like Nigeria. . In the coming years, it may cross the U.S. and adopt cryptocurrencies.
Byrne's view on the sustainability of the global crypto-economy is supported by the current value of cryptocurrencies. Bitcoin and Ethereum fell nearly 6% following the SEC's complaint against Binance, with Bitcoin trading above $27,000 on Wednesday morning.
However, Gensler's campaign against Coinbase doesn't mean there isn't a place for the US-based crypto industry. The Financial Times reported last week that traditional Wall Street names like Charles Schwab and Fidelity are preparing to enter the industry in an attempt to capture and challenge businesses like escrow, the industry term for cryptocurrency. Crypto residents.
"SEC is not law."
In an interview with Fortune , industry executives were surprisingly optimistic about the chances of Coinbase and other crypto firms getting a play on Gensler, though it's unclear whether those sentiments were genuine or strategic.
An executive at a large venture capital firm, who asked not to be named, has sent a letter to a limited partner saying the SEC action does not pose a long-term risk to cryptocurrencies. In addition, lawyers for crypto companies and companies with high-level experience in the US government believed that Gensler, who was not a lawyer, exaggerated his testimony.
"The SEC is not the law," the executive said.
While the odds are generally good for those involved in the law, the outcome of several high-profile cases involving cryptocurrencies and the SEC has been disappointing. This includes SEC v. Ripple is being closely monitored and the agency is investigating whether the XRP token, launched in 2013, is properly treated as a security. And in another case involving Greyscale's faith, Bloomberg Intelligence recently increased the company's chances of success from 40% to 70% after a three-judge panel rejected the SEC's ruling and discretionary application for the bitcoin ETF.
SEC losses in these cases would make the agency less aggressive in its cryptocurrency enforcement, potentially reducing fees or reaching a settlement with Coinbase. For now, however, the market doesn't seem optimistic about Coinbase's future, as Coinbase shares are down 15% in the week since Wednesday.
A person close to Coinbase's management told Fortune that the company doesn't believe Gensler intends to take cryptocurrency off US shores and that cryptocurrencies are simply going through a period of regulatory uncertainty, as other startup industries have done.
"Like Uber or Airbnb, it's a natural process for all regulated utilities," said a Coinbase source.
Common industry opinion is that the cryptocurrency industry will take a break from the courts or Congress to escape Gensler's influence. But the industry knows the worst is yet to come.
Another shoe for a gift
This week, the SEC lawsuits are drawing attention to Binance and Coinbase because the two companies are big names in the industry, but the agency is actively monitoring many other cases against crypto companies. And in an interview with Fortune, he predicted more to come from cryptocurrency insiders, including legal action from the Justice Department, which has the power to bring criminal charges. Many people have said that they expect the Department of Justice to soon make public the allegations against Binance.
When multiple federal agencies are pursuing a company, payments are often stopped at the same time, but not so with Binance. Two months before the SEC complaint, the smaller Commodity and Futures Trading Commission sued the company in federal court, raising questions about the size of the lawsuit.
Industry sources told Fortune that the authorities are indeed coordinating, and that the DOJ's delay in filing charges against Binance could be a complication of the case due to ongoing settlement negotiations with the company or if more time is needed. Some have speculated that Binance will also be sued by the Office of Foreign Assets Control, the Treasury Department's agency responsible for monitoring sanctions violations.
However, two Washington-based cryptocurrency industry experts said competition between the SEC and other agencies has undermined formal cooperation, and that Gensler's personal ambitions and penchant for the camera and political views have made him unpopular.
"He pissed people off at the feds, the Treasury and the Justice Department," said the former Capitol Hill staffer and veteran crypto lobbyist.
Meanwhile, many in Washington were skeptical of Gensler's motives. Critics say the latest tough stance on the crypto industry was designed to push Democrats to avoid massive fraud in stablecoin projects Terra and FTX, as well as a face-to-face meeting with FTX founder Sam Bankman-Fried. To forget
The opinion, he said, the SEC offered the possibility of a law that would free the control of some elements of the corporate kriptovalyutnyh industry, he said that the political wind could change against Gensler in the coming months.
The likelihood of this happening is uncertain and may reflect wishful thinking by the crypto industry. As for Gensler, who declined repeated requests to speak to Fortune , he has proven adaptable and flexible in his demeanor in the eyes of critics, who point to his career path from Goldman Sachs banker to Hillary Clinton's finance chief. Clinton's presidential campaign. About his current role as a close ally of Sen. Elizabeth Warren (D-Mass.) and other crypto-hating progressives.
Regardless of Gensler's motivations, he seems to be dominating the crypto space right now. If Coinbase and other crypto companies somehow survive the mandate, they will have to find a way out of the US mandate.
This story was originally published on Fortune.com.
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