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The SEC has done it again.
We previously talked about the Chronicles of the banking crisis, and Operation Chokepoint 2.0. Choking who? The crypto industry of course.
If you missed the articles, here is the record of the drama unfolding:
Now the SEC, the US Securities and Exchange Commission, has gone all out.
What happened?
Long story short, the SEC has sued Coinbase, the largest crypto exchange in the US, and Binance US and its CEO Changpeng Zhao (or CZ as commonly known).
To be honest, this is not surprising given that Coinbase received a Wells notice a few weeks back, and Binance has always been scrutinized closely.
On what grounds?
SEC has sued Coinbase and Binance on allegations of violating securities law, failure to register as a clearance agency, failure to register as a broker, and failure to register as an exchange, as well as for offering skating as a service.
The SEC wants Coinbase to seize further operations until it properly registers.
At least 67 cryptocurrencies are now seen as securities by the SEC, including 10 of the largest ones (such as SOL, ADA, MATIC, SAND, MANA, ALGO, FIL, ATOM), affecting over $100B worth of tokens. It also names BNB and BUSD stablecoin as securities.
All allegations against Coinbase end here at security regulations violation.
However, in the case of Binance US, there is also an allegation against commingling of user funds, where customers’ assets were put in another legal entity that CZ controls and owns, and were associated with buying BUSD.
With this, in order to ensure Binance US customers are “protected”, the SEC filed for a restraining order to freeze all Binance US assets.
What’s the Howey test?
If you’ve been following the news, you might have heard the Howey Test being brought up.
This is because it’s used to determine whether an asset qualifies as a security.
It contains 4 criteria, and if an asset meets all of them, then it will be considered to be a security:
Investment of money (you buy it with money)
Expectations of profit (you are expecting to make money out of it).
In a common enterprise (meaning the price action is the same for everyone who invested in the same asset).
Derived from the efforts of a promoter or a third party (be it an individual, institution, or some combination of both).
The first 3 criteria are fairly straightforward, and it is safe to say that almost all cryptocurrencies meet them.
However, it’s the last one that makes it complicated because sometimes it is not easy to identify a third party creating an expectation to profit from a particular coin or token. There is an element of how “sufficiently decentralized” or not they are.
Why does it matter?
Well… the SEC regulates assets that are classified as securities, such as stock.
Therefore, since the Howey test determines if an asset is a security or not, it then determines who has jurisdiction over it.
If the SEC can prove that cryptocurrency is a security, then it will fall under their realm of power
. And it ain’t secret that the SEC is not particularly friendly towards the crypto industry.
What is the impact?
Currently, there is no legal precedent to support the SEC’s case. Their battle with Ripple has been ongoing for a few years now and it is still not settled.
So if the SEC can set up this precedent, then it creates the possibility that all crypto exchange companies in the US might face the same kind of crackdown.
We can already see some exchanges delisting those coins and tokens that were mentioned as securities in the lawsuits against Coinbase and Binance out of caution.
Additionally, the SEC takes special issue with Coinbase Wallet, because through it, retail investors have access to thousands of cryptocurrencies (referring to Decentralized Exchanges such as Uniswap), which makes it even more clear that they are trying to target DeFi as well.
Is this a smart or stupid move by the SEC?
Probably something in between. It’s never so black and white.
Gary Gensler, the Chairman of the SEC, possibly has some other priorities and political aspirations here by trying to crackdown on crypto and please his stakeholders.
And these things take time, who knows if he will continue to be in his current role or not when there is a result of its lawsuits.
Zooming Out.
Everything we just covered in this article is focused on what is happening in the US.
For the crypto industry, facing a headwind with the world’s largest economy is definitely not great, but crypto development will continue to happen with or without the US.
So while other American Institutions that are supportive of crypto try to put up a fight against the SEC, timing is critical, and we might just see this key innovation and development being driven abroad to other countries. We have already seen the rest of the world showing very bullish signs, including China.
So ultimately, the SEC will not be protecting the US retail investor. It is not driving protection, rather it is driving exclusion.
…………………..
Undeniably, this is quite indignant.
However, the story is still unfolding, so we will continue to share crisp summaries with you all as things progress.
The good news is, as I just said, crypto will continue to develop regardless of what happens in the US. It might take longer, but the genie is out of the bottle, and we will share in the next article all the great development that’s been happening quietly in the background!
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