Questions Surrounding the Viability of Cryptocurrency Companies Following SEC Lawsuits

After the crypto winter and the alleged fraud committed by FTX founder Sam Bankman-Fried, lawsuits have now emerged.

The US Securities and Exchange Commission last week filed charges against the world’s largest cryptocurrency exchanges, Binance and Coinbase, deepening tensions between the government and a volatile industry that has been marked by scandals and market crashes.

Binance and Coinbase allegedly broke the law by operating as securities exchanges without registering their business with the SEC. Along with the CEO, Binance faces additional charges, among other accusations, of diverting customer funds to a separate business. Most recently, the SEC asked a federal judge to freeze the funds of Binance’s US platform.

The lawsuits are the latest in an ongoing battle between government officials, who describe the crypto industry as the “Wild West,” and digital asset creators who seek to legitimize cryptocurrency as the currency of the future.

Industry leaders say that with their latest actions, US regulators make it clearer that they are working to ensure that cryptocurrencies have no place in the traditional financial system.

And leading regulators are more open about their thoughts on the benefits of cryptocurrency. SEC Chairman Gary Gensler told Bloomberg on Tuesday: “We don’t need more digital currency…we already have a digital currency – it’s called the US dollar.”

The results of the legal battle could greatly slow the growth of the crypto industry or, alternatively, limit the SEC’s regulatory authority.

Federica Pantana, an attorney at Davidoff Hutcher & Citron in New York who handles SEC cases, has been watching the episode unfold and is now clear with her crypto clients in the meantime: “With the SEC taking on a strong enforcement agenda, there’s no question that companies need to see that cryptoassets are securities and must be accepted by platforms that exchange these assets.”

Pantana said whether crypto trading companies have decided it makes business sense to register with the SEC or divest their businesses all together. The repercussions of the lawsuit could cause some businesses to go out of business, he said.

The crypto industry already knew it was under the harsh spotlight of regulators and politicians in Washington. The collapse of crypto prices last year, along with the collapse of several prominent crypto companies, including FTX, exposed investors to billions of dollars in losses. Gensler had repeatedly stated both to Congress and in public appearances that he believes the SEC has more than enough power to regulate the industry.

Treasury Secretary Janet Yellen told CNBC on Wednesday that she “very much” supports the SEC using the tools it has to protect consumers and investors.

Despite increased scrutiny from regulators, the crypto industry expected Congress to eventually step in and help legitimize the industry with new laws. Democrats and Republicans introduced several bills last year that would have placed crypto under the authority of the Commodity Futures Trading Commission and made other products, including stablecoins, more legitimate by standardizing what assets those products can hold.

Yellen said Wednesday that she sees “some gaps in the system where I think additional regulation would be appropriate, and we would like to work with Congress to get additional legislation passed.”

Crypto lobbyists now believe that these laws are more urgently needed to prevent the SEC from continuing its lawsuit.

The most viable legislation is in the House Financial Services Committee, led by panel chairman Rep. Patrick McHenry, R-N.C.. The legislation was introduced by Glenn Thompson, R-Penn., chairman of the House Agriculture Committee.

Their discussion in the draft bill seeks to limit agencies’ jurisdiction over certain digital assets and “strike an appropriate balance between consumer protection and the promotion of responsible innovation,” McHenry said in a press release.

The new legislation would give issuers of digital assets an exemption from securities laws if they meet certain conditions, and would exclude digital assets and stablecoins from the securities laws’ definition of a security, among many other provisions.

“Congress has no choice but to proceed judiciously with legislation to clear up this confusion,” said Blockchain Association CEO Kristin Smith.

Perianne Boring, founder of the Chamber of Digital Commerce, one of the cryptocurrency industry’s top lobbyists, said the SEC’s actions against Binance and Coinbase are “arbitrary and outright” and “the SEC’s strong enforcement in this industry is politically motivated, judicially opening a risk against the SEC.”

He said Gensler’s public comments about the merits of cryptocurrencies over the traditional financial system go against his role as SEC chairman to protect consumers and investors.

“They’re not a merit regulator,” Boring said.