The SEC Suing Coinbase and Binance Is Backfiring

This week, SEC Chair Gary Gensler went scorched-earth on crypto.

Not only did America’s top financial cop go back-to-back in suing the world’s two top crypto exchanges Binance and Coinbase in less than 24 hours — he also filed a motion to freeze the former’s assets in the US.

Coinbase’s stock cratered in reaction to the news, falling 27% at the low, and one lucky trader with the inside knowledge turned $100K into millions on Tuesday.

The two lawsuits are quite different in what they allege, but the end result may as well be the same: The SEC is making its hardest push yet to box out other regulators and, once and for all, kill crypto in the US. Here’s why:

The Backstory

America’s other financial agency, the Commodity Futures Trading Commission, or CFTC, beat the SEC to the punch in suing Binance. They filed their lawsuit back in March. In that lawsuit, we learned some juicy details about Binance CEO, Changpeng Zhao, and just how connected he was to the inner-workings of the exchange that accounts for more than half of the entire globe’s crypto trading volume. (And yet, somehow CZ still has time to approve his company’s tedious expense reports, including one for office furniture.)

But the SEC’s lawsuit, which hit Monday, went far deeper and raised far more concerning allegations. Expectedly, the SEC said Binance was illegally running an unregistered exchange. Quite unexpectedly, the SEC’s lawsuit also revealed an internal message from Binance’s Chief Compliance Officer to another employee that noted Binance was, “operating as a fking unlicensed securities exchange in the USA bro.” (Kids, don’t email admissions of guilt!)

Worse yet, the agency accused CZ’s other owned entities of knowingly faking trading volumes on Binance’s US platform. The SEC also claimed CZ fired people at those other entities when they discovered something was off. And that’s … not good. (It remains to be seen whether the Department of Justice chooses to join the SEC in exploring the case.)

The Cause

It quickly became clear, however, that the SEC’s lawsuit against Binance was about much more than just Binance. The suit also identified 10 cryptocurrencies the SEC deemed to be securities (including Binance’s stablecoin BUSD — which the CFTC had previously called a commodity in their lawsuit months prior.)

Less than 24 hours later, the SEC would also list more problem tokens in a lawsuit filed against Coinbase. The move by the SEC became clear: They were trying to make a point that crypto tokens are securities, and therefore, fall under the SEC’s jurisdiction — not the CFTC’s. That would be important, since the CFTC is seen as far friendlier to policing crypto.

In fact, in a widely overlooked House bill draft published Friday last week, House Republicans were already working through a pathway for crypto projects to transition from being securities to being classified as commodities. Many are now speculating Gary Gensler chose this specific time to strike — right before Tuesday’s House hearing to discuss that bill. And it may have worked.

The House hearing, which had previously called Coinbase’s lead counsel as a witness, began with an awkward mention of the SEC’s recent legal action against Coinbase.

“I do want to address one more elephant in the room. Earlier today the SEC filed a complaint against one of our witnesses — Coinbase,” House Committee on Agriculture Chair Thompson said. “I do want to note that action is exactly why we’re having our hearing today. Regulation by enforcement is not an appropriate way to govern a market, adequately protect customers, or promote innovation.”

Alright, so maybe it’s actually backfiring! In fact, House Financial Services Chair Patrick McHenry later scheduled an emergency hearing for next week on digital assets. There now seems to be mounting political will to figure out a way to prevent US crypto companies from being pushed offshore.

The Effect

By going scorched earth, Gary Gensler is looking to use the SEC’s power to shut down crypto exchanges. If he doesn’t come out swinging to classify crypto tokens, well, his Securities and Exchange Commission might not have much power to stop them.

But why is it such a priority to stop them?

There is a legitimate case to be made that improvements are needed from exchanges to ensure they aren’t manipulating trades. But, I don’t really think this is about that. If you actually listen to Gary Gensler, he’s being incredibly misleading.

As I’ve highlighted, the US government is continuing its work on its own digital currency, or CBDC. The reason for this is because the Fed and other financial officials know traditional banking system rails are slow and in danger of losing out to crypto. The Fed is about to launch a test of its “FedNow” system this summer, which expedites inter-bank transfers. But banks still have a number of issues aside from being slow.

On CNBC Tuesday, Gensler tried to explain that there is no need for digital currencies because, “we already have digital currency. It’s called the US Dollar, it’s called the Euro, it’s called the Yen.”

Moments before he said that, he tried to make the point the SEC is supposed to be “technology neutral.” That it’s not supposed to choose which technology wins or loses, or be the judge over whether crypto has a legitimate use case.

But by chopping off access to crypto by shutting down exchanges, Gensler is, in effect, choosing a loser. Actions speak louder than words. And right now, the SEC is positioning a US digital currency that can be tracked and turned off as the only winner.

That should be terrifying to anyone paying attention.

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