The Echo-nomist

The crypto market was relatively drama-free for the past few days. The Securities and Exchange Commission (SEC) broke that streak with something that got everyone rethinking the future of crypto. They began by suing the global giant Binance on Monday, aka the largest crypto exchange in the world. Following this, they filed a lawsuit against Coinbase, Binance’s competitor in the US. They didn’t even get their two weeks’ notice!

This bold move by SEC sends a signal to other crypto exchanges, as well as other market regulators. But before we dive into that, let’s understand their reasoning for filing a lawsuit.

Bang, Bang, Shots Fired at Binance

The case filed against Binance not only targets the company, but also takes shots at its CEO, Changpeng Zhao. There are 13 civil charges in total, including an accusation of Zhao secretly controlling the Binance.US platform, despite claiming to have no involvement in it. The other charge includes suing Binance.US and the company that operates it, BAM Trading Services for operating unregistered securities. Basically, BAM Trading Services is responsible for managing the operations, compliance and regulatory aspects of Binance.US, ensuring that it adheres to applicable laws and regulations in the United States. They didn’t do such a great job with that.

To be fair, the former chief compliance officer of Binance provided the shovel to dig this grave when in 2018 his texts to another colleague got leaked. The text read, “We are operating as a f****ng unlicensed securities exchange in the USA bro.” The SEC has used this particular text as a strong evidence in their case.

Binance has denied all of these accusations. In fact, they even released a statement, referencing the text, which read, “while we take the accusations in the SEC’s complains very seriously, they should not be the subject of an SEC enforcement action, let alone on an expedited basis.” (source: Binance’s blog)

Next up, Coinbase

The smile was wiped off Coinbase’s face when the SEC slammed a case against them the next day. Their case was pretty similar to Binance’s minus the claims against the CEO. The SEC believes they too have been operating unregistered securities. They are accusing them of failing to register as an exchange, brokerage, and clearing agency while offering trading services for crypto assets. Their complaint reads, “Coinbase has for years defied the regulatory structures and evaded the disclosure requirements that Congress and SEC have constructed for the protection of the national securities market and investors.”

Coinbase denied these claims and said that they had demonstrated a commitment to compliance. They shot back that the securities exchange commission has never established clear rules for crypto companies. Earlier this year, Coinbase sued the SEC in an attempt to get some answers around legalising crypto securities. With the SEC filing a case against them, their current relationship is heavily strained. Tit fort tat?

Road to Lawsuits

When the world was under lockdown, crypto assets became pretty attractive for investment purposes. Crypto assets like NFTs became popular among the youth. In 2021, crypto found itself in an amazing bubble as the prices of cryptocurrencies skyrocketed, people shared stories about earning shit-tons of money through crypto investments and companies such as crypto.com and FTX were earning insane amounts. El Salvador even gave Bitcoin the same status that fiat money has! But eventually, this bubble grew until it burst. It started with the implosion of Luna and it has pretty much been downhill since. As an aftermath of the Luna crash, the crypto hedge fund Three Arrows Capital collapsed. In the months that followed, other major firms felt the aftershocks. A lot of companies halted or limited withdrawals as people were rushing to liquidate the money they invested in crypto assets. The cherry on top was companies like Voyager Digital, BlockFi, Genesis, and Celsius filing for bankruptcy.

The SEC had reached a tipping point and decided to set a long-awaited example for the crypto makret. They went on a spree and sued Terra and its CEO Do Kwon, Celsius CEO Alex Mashinsky, Gensis, Gemini, and FTX among other players in the market. Once it slammed some cases on companies that faced bankruptcy, they began taking action against some of the smaller companies. Eventually, they pulled out the big guns with Binance and Coinbase to send shockwaves throughout the industry.

The SEC is definitely setting a precedent with these cases. The crypto market has had their taste of freedom but the authorities have been spectators for too long.

Investors Speak

Investors were already nervous about their crypto investments considering the flow of events in the market over the past year. However, this move by the SEC just made their anxiousness apparent.

The price of Bitcoin plunged to $25,440 after having an upwards trajectory, nearly touching $30,000 last week. BNB, the crypto owned by Binance was down 5% after the lawsuit was announced.

Unlike Binance, Coinbase was a publicly traded company (remember their IPO in 2021) so of course the anxiousness surrounding the lawsuit was projected on their share prices. Initially, their share fell by a whopping 20% before settling at 12% decline. On Tuesday, the day that the case against Coinbase was announced, investors withdrew more than $700 million from Binance and around $600 million from Coinbase.

On the bright side, these figures seem pretty small compared to when investors withdrew as much as $3 billion from Binance, in a 24-hour window after Bankman-Fried was arrested. This is probably because a lot of the investors in the crypto market do not exactly trust government regulation. They believe that regulations take away the essence of crypto i.e. decentralisation.

What’s next?

There’s 2 sides to a coin – the SEC is just trying to set some regulations to protect the investors and the companies feel that SEC doesn’t have enough rules regarding crypto to actually sue them.

Both the companies have made it clear that they will fight the case. The only problem here is that court cases take a longgg time to reach a verdict. Regardless, both the companies will look for loopholes to get out of there respective cases. These loopholes shouldn’t be that hard to find since there was never much clarity around rules for crypto trading.

There’s a possibility of the case actually getting solved in the near future. If the SEC wins, Coinbase will have to shut down its operations and Binance will have to close its US division (while continuing to operate in other countries). If there is an emergence of harsh regulatory rules in the US, it might increase the adoption of crypto assets outside the country since 86% of all crypto trading volume occurs outside of the US.. It could result in companies moving their operations offshore and realising their international nature.

Even if this court case takes forever to win/lose, one possibility is that this increases the adoption of crypto in other countries. But it could also provide the push other countries needed, to set some solid rules regarding investor safety and crypto exchanges. Regulatory bodies have been tiptoeing around the topic for months, afraid to disturb the market. However, the measures that SEC has been taking, coupled with the crypto tax in India, other regulatory bodies might not refrain from setting rules.

A third possibility is accepting the fact that the crypto hype has died down. The crypto whales have made their billions and are off to the next big thing, while the average crypto trader is left holding the bag. The numbers speak for themselves; in November 2021, the crypto industry’s market cap reached $3 trillion, and is now down to $1.1 trillion. That’s nearly a 66% dip! Eventually investors will move on to new areas of investment, probably ones safer than crypto.

There are always more possibilities, especially in the crypto industry (they’ve reminded us about that from time-to-time). These cases are SEC’s way of taking charge. If they win the cases, crypto companies will be looked at very differently in the US. Either way, they have operated without any regulations for far too long. With the SEC bringing in close to 150 cases in the area of crypto, they’re going to be pretty busy. The crypto industry is now a battlefield between regulators and companies and none of them seem to be raising a white flag soon. May the best man win…