Coinbase’s pending legal showdown with the US markets regulator has the crypto industry wondering who’s next.
Coinbase, a target for the Securities and Exchange Commission since Gary Gensler took over as chair, this week received a Well’s Notice — a formal declaration of the SEC’s intent to bring a lawsuit.
Coinbase echoed the industry’s main complaint: The SEC claims participants should come in and register. Gensler allies say he’s making them obey the law or leave. The industry’s large intermediaries say that the SEC stonewalls registration — thus the efforts look like an attempt to kill the industry outright.
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“The fate of Coinbase is largely the fate of centralised exchanges and their relationship to the SEC,” Phil Moustakis, a partner at Seward & Kissel, told DL News. Moustakis led many of the SEC’s earliest lawsuits involving Bitcoin while an attorney in its enforcement division up through the initial coin offering era.
The key question now: What next?
“Oh, a stablecoin case,” Moustakis said. “I don’t mean a stablecoin used in connection with fraud. I mean an enforcement action brought against a stablecoin issuer for the issuance of an unregistered security.”
John Reed Stark, former director of the SEC’s office of internet enforcement, said that while the SEC has hinted that stablecoins may be next in the SEC’s crosshairs, he has another theory: “Binance, or maybe Tether.”
“Binance’s operations have been so void of transparency and sunlight that there’s a need for criminal prosecutorial and civil regulatory intervention,” Stark said.
Binance did not respond to a request for comment.
Stablecoins
The other branches of the Biden administration — notably the Treasury — spent much of 2022 overtly pushing for legislation on stablecoins, which would in theory stake out the boundaries of agency reach without leaving it up to the SEC to duke out in court.
But the administration has clearly soured on stablecoins, with an economic report released this week comparing them unfavourably to a central bank digital currency and linking them to money market funds, which are already regulated by the SEC.
“I continue to believe, quite strongly, that stablecoins should be regulated in the same manner as money market mutual funds because they operate on the same basic premise — we commit not to break the buck,” Bert Ely, a financial services consultant and founder of Ely & Co, told DL News.
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The SEC did recently step into the stablecoin market to shut down Paxos’ maintenance of Binance’s stablecoin. Meaningfully, they did not touch Paxos’ own PUSD. But that doesn’t mean stablecoins are free and clear.
Binance
If criminal in nature, the Department of Justice would take point on those cases.The DOJ said in December it is probing possible money laundering and criminal sanctions violations at Binance.
Binance chief strategy officer told The Wall Street Journal that he expects the firm will pay a fine to settle its probes, which also includes a Commodity Futures Trading Commission investigation into whether Binance offered crypto derivatives to US clients without registering with the agency.
Binance faces other hurdles, among them: Its auditor stopped servicing crypto clients.
Coinbase
Coinbase is a star performer in many roles of the crypto market that Gensler has said are masquerading as anything other than securities intermediaries. And it became the only crypto exchange to go public in the US on the very same day that the Senate confirmed Gensler.
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Most SEC cases in the crypto sphere have ended in settlements, which Coinbase likely sought prior to going public with the Wells Notice. It has in the past delisted tokens the SEC named as securities and aborted its lending service.
But to all appearances, the SEC is gunning for the core of Coinbase’s business. Coinbase maintains that the firm has no path to register. Representatives for the agency did not respond to a request for the agenda for Coinbase’s report of more than 30 meetings in nine months.
NFTs, Ripple
Stark also named NFTs as an unexplored region of the SEC’s potential domain. The SEC subpoenaed the DAO behind decentralised exchange SushiSwap, according to a post this week by “head chef” Jared Gray.
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But at the same time, as the SEC is expanding its crypto-specialist staff, they are working within the limits of finite resources and against rich firms. These massive cases drag on for years and gobble up resources. The SEC has yet to resolve the case launched against Ripple in the twilight of Jay Clayton’s tenure, and that’s only over a single crypto token, XRP.
That pales in comparison to the hundreds listed on Coinbase.
“This is the main event. I don’t think there will be any winners here,” Moustakis said.